Greece, lenders declare progress as inspectors depart

By Renee Maltezou

ATHENS | Wed Oct 17, 2012 9:33am EDT

(Reuters) - Inspectors from Greece's international lenders will leave Athens after making substantial progress on talks to unlock aid for the near-bankrupt country but without agreement on crucial labor reforms, officials said on Wednesday.

After months of often heated and testy negotiations, Athens and its European Union and International Monetary Fund lenders appeared to be in the home stretch toward a comprehensive deal needed to avoid a Greek bankruptcy.

"There is an agreement on all issues except labor reforms," senior Greek government official said. "We still have work to do but we are on the right path."

In a rare statement to reporters during talks late on Tuesday, the IMF's mission chief for Greece, Poul Thomsen, also declared that the two sides had agreed on "most policy issues", with agreement on the rest expected soon.

Thomsen and his European Commission and European Central Bank counterparts are due to depart Athens on Wednesday to brief leaders at a two-day European Union summit, where Greece's future will loom large despite not being the focus of talks.

With Greece due to run out of money next month and Europe determined to avoid fresh market turmoil that drags down bigger economies like Spain and Italy, Athens is expected to ultimately secure aid despite months of squabbling with its lenders.

Once talks on the austerity package and reforms are wrapped up, the so-called troika of European Commission, European Central Bank and IMF lenders is due to present a report on Greece's progress in meeting the terms of its bailout.

European leaders have said this is a key assessment in determining whether the country can unlock the 31.5 billion euro aid tranche.

Athens needs the blessing of the troika on a 11.5 billion euro austerity package as well as a long list of reforms.

Talks on both fronts have moved slowly since July, with signs of progress tempered by tension and mistrust over the ability of Greece's political brass to push through public sector reform and generate savings.

"HARD RED LINE"

On Tuesday, the two sides resolved differences on the extent of Greece's recession next year and issues related to health spending cuts after hitting an impasse on labor reforms during an earlier round of talks, officials said.

They agreed Greece's economy would contract 4.2 percent next year - a key estimate in calculations to determine whether Greek debt will be viable - after Athens initially predicted a 3.8 percent tumble and lenders forecast a 5 percent contraction.

Officials also suggested that most of the issues related to the long-discussed spending cuts package had been resolved apart from disagreement over the use of brand name or generic drugs in the state healthcare system.

"There has been substantial progress on all fronts and only some issues remain open, mainly labor and structural," a second Greek government official said.

"We are confident these will also be resolved in time."

Still, the two sides seem unable to bridge differences on controversial labor market reforms that have drawn the ire of Prime Minister Antonis Samaras's coalition partners.

Fotis Kouvelis, head of the Democratic Left junior partner in the government, has refused to budge from his stance against proposals to cut state wages and severance payments and scrap automatic wage increases.

"This is our hard red line and we're not going to back down on it," a party official said.

Both Kouvelis and the other junior partner in the coalition, Evangelos Venizelos's PASOK socialist party, have fought the troika's attempts to introduce a new round of wage and pension cuts, arguing that an angry and exhausted nation cannot take more belt-tightening.

Greek journalists walked off the job on Wednesday as workers began the first of two days of strikes and work stoppages to protest the new austerity measures. Much of Greece is expected to come to a standstill during a general strike on Thursday.

Mired in its worst post-World War II crisis, Greece is struggling through its fifth consecutive year of recession. Over a quarter of Greeks are out of a job, poverty and suicide levels have jumped and thousands of businesses have shuttered in what Samaras has called Greece's very own "Great Depression". (Writing by Deepa Babington; Editing by Toby Chopra)