By Ingrid Melander and Ben Deighton
ATHENS/LUXEMBOURG (Reuters) - International lenders said on Friday they expect to provide Greece with a next slice of aid in July to avert a looming default, after they conduct further talks on a tougher economic programme for Athens.
The European Commission, the European Central Bank and the International Monetary Fund issued the statement after a month-long review of Greece's progress under a 110 billion euro ($160 billion) bailout plan agreed last year.
They said Greece had made considerable progress toward repairing its finances under the plan, but fiscal and economic reforms had to be stepped up.
"Building on the agreed comprehensive policy package, discussions on the financing modalities for Greece's economic programme are expected to take place over the next few weeks...the next tranche will become available, most likely, in early July," they said.
Finance Minister George Papaconstantinou has said Athens will be unable to meet its obligations from mid-July if it does not get the next 12 billion euro loan tranche of the bailout, originally due to be released on June 29.
Separately, a senior European official held out the prospect of additional aid for Greece beyond its current bailout scheme. He gave no figures.
"I expect the Eurogroup to agree to additional finance being provided to Greece under strict conditionality," Jean-Claude Juncker, who heads the group of euro zone finance ministers, said after talks with Greek Prime Minister George Papandreou in Luxembourg.
One condition for the extra aid would be that private sector bondholders would participate in helping Greece on a voluntary basis, Juncker said. He did not say how, which is still under intense debate among EU and ECB officials.
Greek newspaper Kathimerini said a new three-year bailout package for Greece, to run until mid-2014, would be worth a total of 85 billion euros, of which the EU and the IMF would provide less than half.
The prospect of a second bailout for Greece calmed bond market fears of a default, pushing down Greek bond yields and the cost of insuring its debt on Friday, and helped ease market pressure on other vulnerable southern euro zone countries including Spain and Italy.
The Greek government has drafted a medium-term budget plan featuring deeper spending cuts, measures to boost revenues and a faster sell-off of state assets, which Papandreou presented to Juncker during their two-hour meeting. Athens has agreed to establish an independent agency to manage privatizations.
OFF COURSE
Greece has missed fiscal targets in its current bailout programme because of a revenue shortfall due to a deep recession and chronic tax evasion, requiring extra steps worth 6.4 billion euros or 2.8 percent of gross domestic product this year.
The Greek finance ministry said on Friday that the government would finalize new fiscal measures in coming days, putting them to parliament after the cabinet approves them.
Leftists staged a protest at the finance ministry in Athens, hanging a huge banner across the building to denounce policies which they said would "turn workers into modern slaves."
The new bailout programme for Greece faces rising opposition from trade unions and youth protesters, as well as from some back-bench members of Papandreou's governing PASOK socialist party.
Increased European funding for Greece may in turn face resistance in the parliaments of fiscally conservative northern states, especially Germany and the Netherlands.
KICK CAN DOWN ROAD
Some European politicians and economists argue that investors who bought Greek government bonds should share that burden, perhaps by cutting the value or extending maturities.
Claudio Loser, a former director of the Western Hemisphere for the IMF, said the Fund should push harder for Greece to restructure its debt and negotiate so-called "haircuts," or reductions in the value of bonds, with investors.
"Greece will have to take one or two of the two actions -- restructuring with a haircut and maybe abandoning the euro, although I would say abandoning the euro will be more complicated," Loser told Reuters Insider television.
But the ECB has fought such ideas, fearing it would provoke a crisis among European banks which hold large sums in Greek debt, and lead to a violent chain reaction on financial markets far beyond Greek borders.
A euro zone source familiar with talks on additional aid for Greece said the participation of private sector investors in the new deal would be limited to avoid triggering a "credit event." He gave no figures.
"I think (official lenders) have a plan in their head that is reasonable for kicking the can down the road another three months," said Gianluca Salford, European fixed income strategist at JP Morgan.
Most market economists polled by Reuters believe Greece's 340 billion euro debt mountain is unsustainable and will have to be restructured sooner or later.
(Additional reporting by George Georgiopoulos and Lefteris Papadimas in Athens, Marius Zaharia, Ana Nicolaci da Costa and Chloe Hayward in London; Writing by Paul Taylor; Editing by Ruth Pitchford and Andrew Torchia)
