By Andreas Rinke and Lefteris Papadimas
BERLIN/ATHENS (Reuters) - International lenders failed for the second week to reach a deal to release emergency aid for Greece and will try again next Monday, but Germany signalled that significant divisions remain.
Euro zone finance ministers, the International Monetary Fund and the European Central Bank were unable to agree in 12 hours of overnight talks in Brussels on how to make the country's debt sustainable. They want a solution before paying the next loan tranche which is urgently needed to keep Greece afloat.
Several European officials played down the delay, saying the disagreements were technical and a deal would be reached when they meet again on November 26.
German Finance Minister Wolfgang Schaeuble said he was confident the funding gap could be filled by a mixture of letting Greece buy back its own debt at a discount, tapping ECB profits on Greek bond purchases, and lowering interest rates on government loans to Athens, but not below the cost to lenders.
"Additional measures are needed and we have spoken about this intensively with the International Monetary Fund. We agree essentially that the gap can and will be filled, that a buyback programme of Greek debt on the market will be carried out," he told reporters.
Schaeuble earlier told conservative lawmakers at a closed-door briefing that the lenders were split over how to define debt sustainability and fill a hole in Greek finances.
"He sees the extension of the debt sustainability goal as one of the main bones of contention. The other is how to cover the Greek financing gap of 14 billion euros through 2014," said one lawmaker who attended the meeting of Chancellor Angela Merkel's centre-right Christian Democrats in parliament.
European governments want to give Greece an extra two years, until 2022, to cut its debt to a sustainable level of 120 percent of GDP but the IMF does not agree.
The Europeans, led by Germany, are refusing to write off any loans. Both options would make it easier for Greece to meet the targets in the bailout programme.
Merkel told the lawmakers the gap could be plugged by lowering interest rates on loans to Greece, extending their maturity to 30 years from 15, and increasing guarantees provided to the euro zone's temporary EFSF bailout fund, in which Germany would take its share, a participant said.
"I believe there are chances, one doesn't know for sure, but there are chances to get a solution on Monday," she told the Bundestag lower house of parliament during a debate.
Any options that cost the German taxpayer more money come with a heavy political price tag with elections less than a year away and would have to voted through by an increasingly restive Bundestag.
"If we get the impression we are being cheated, we won't come to the rescue anymore when you need our support," Social Democrat leader Peer Steinbrueck warned in a speech to the chamber just before Merkel took the podium.
Until now Merkel has been able to count on the support of parties like the SPD and Greens to help push through controversial bailout votes in the lower house.
Greece needs the next 31 billion euro aid tranche to keep servicing its debt and avoid bankruptcy. Its next major repayment is in mid-December.
Athens says it has carried out the tough reforms required in the bailout programme but needs more time to reach fiscal targets agreed with lenders because its economy keeps shrinking.
French Finance Minister Pierre Moscovici said agreement was close, echoing overnight comments from Eurogroup chairman Jean-Claude Juncker, who said talks were stuck on technicalities.
"We are a whisker away from a deal. I am very confident we will get there on Monday," Moscovici told Europe 1 radio.
Greece is increasingly frustrated about the repeated delays in releasing the aid and says it has done what is necessary.
"Greece did what it had committed it would do. Our partners, together with the IMF, also have to do what they have taken on to do," Prime Minister Antonis Samaras said in a statement.
"Any technical difficulties in finding a technical solution do not justify any negligence or delays."
Samaras will meet Juncker in Brussels on Thursday and has cancelled a trip to Qatar next week to monitor the talks, a government spokesman said.
The prime minister is under growing pressure from his own coalition allies and the opposition after pushing through deeply unpopular austerity measures that he said were the only way to get more aid to avert bankruptcy.
"�he euro zone cannot use Greece as an alibi to justify its weakness in dealing effectively and definitively with the crisis," said Evangelos Venizelos, head of the co-ruling PASOK party. Opposition leader Alexis Tsipras, whose party is rising in polls, said Samaras had lost all credibility.
Investors were disappointed with the news. Greek banking stocks fell nearly 6 percent in morning trade. Most of Greece's next aid instalment has been earmarked to shore up the country's tottering banks.
The euro, European shares and the prices of higher-yielding euro zone debt lost ground but later recovered some of the losses.
NO WRITE DOWN
A document prepared for the Brussels meeting and seen by Reuters showed Greece's debt cannot be cut from 170 percent of GDP to 120 percent, the level deemed sustainable by the IMF, unless either euro zone member states write off a portion of their loans to Greece or the IMF extends its deadline by two years.
Germany and other EU states say writing down their loans would be illegal. The European Central Bank, a major holder of Greek bonds, has refused to take a "haircut" on its holdings.
Berlin contends a debt haircut would not tackle the roots of Greece's debt problems and would be unfair to other euro zone countries that have taken tough steps to improve their finances.
"It would cost money, it would be a fatal signal to Ireland, Portugal and possibly Spain, as they would immediately ask why they should accept difficult conditions and push through difficult measures ... and it would have consequences under budget law," Norbert Barthle, budget spokesman for Merkel's Christian Democrats said.
Without corrective measures, the Eurogroup document said, Greek debt would be 144 percent in 2020 and 133 percent in 2022.
Juncker said after a meeting a week ago that he wanted to extend the target date to reduce Greek debt by two years to 2022, but Lagarde insists the 2020 goal should stand. She is believed to favour euro zone member states taking a writedown.
Under a buy-back plan, Greece would offer to purchase bonds from private investors at a sharp discount to their face value. Options are under consideration including using about 10 billion euros of EFSF money to buy back bonds at between 30 and 35 cents on the euro.
There are also proposals to reduce the interest rate on loans already extended by euro zone countries to Greece, to allow a long moratorium on interest payments and lengthen the maturities on loans, all of which would cut the debt burden.