Kroes, a member of the Dutch ruling right-wing Liberal party VVD, is not a supporter of Greece exchanging the euro for the drachma, but says: ‘It is absolutely not a case of man overboard if someone leaves the eurozone.’

The commissioner is very critical of the new Greek government and says they are not fulfilling their promises. ‘Too few spending cuts, too little restructuring,’ she says.

She says the Greeks should follow the example of Italy where the new prime minister Mario Monti is taking ‘dynamic action’.

‘And it is creating just as much pain in Rome as it is in Athens,’ Kroes told the Volkskrant.

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The leaders are caught between their increasingly frustrated partners in the European Union for failing to pass the reforms quickly and workers who went on strike on Tuesday to protest against the austerity measures.

European Union (EU) officials say the full package must be agreed with Greece and approved by the euro zone, European Central Bank and International Monetary Fund before February 15 to allow time for complex legal procedures involved in the bond swap to be completed in time for a March 20 bond redemption.

In some euro zone countries, including Germany and Finland, parliamentary approval is required to raise the bailout money.

In Paris, German Chancellor Angel Merkel on Monday expressed the exasperation among euro zone leaders at seemingly endless arguing in Athens that has yet to produce a definitive acceptance of the austerity and reform demanded by the lenders.

“I honestly can’t understand how additional days will help. Time is of the essence. A lot is at stake for the entire euro zone,” she told a news conference with French President Nicolas Sarkozy.

But leaders of the three parties in the coalition government appeared to need at least one additional day.

The office of Prime Minister Lucas Papademos, a former central banker who heads a government of politicians, said that a meeting of leaders from the conservative, socialist and far-right parties due on Monday had been postponed to Tuesday.

No reason was given for the delay. Papademos held further talks with the “troika” of lenders – the European Commission, ECB and IMF – on Monday.

The party leaders, positioning themselves for a likely general election in April, have balked at accepting another package of deeply unpopular wage and pension reductions, job cuts and tougher tax enforcement measures.

Alarmed by the prospect of yet more budget cuts, Greece’s two main trade unions said they would hold a 24-hour strike on Tuesday in protest against policies they say have only driven the economy into a downward spiral.

Demonstrations are planned in central Athens.

PATIENCE WEARING THIN

Greeks watched the political drama with the same exasperation they have shown throughout the nation’s nearly three-year crisis, mixed with fear of the consequences of leaving the euro.

“We are stuck between a rock and a hard place. We are lost either way but political leaders have to agree,” said Kosmas Georgiou, a 31-year old company inspector. “Going back to the drachma is not an option, it’s disaster.”

“They are delaying this just to look like heroes.”

Merkel made clear that her patience was wearing thin on a deal that affects not only Greece but the wider currency bloc, which fears that a default would hit much larger economies such as Spain and Italy.

One government official said the entire Greek side had to agree terms of the rescue, which would be the second for Athens since 2010, with international lenders before the next meeting of the Eurogroup of euro zone finance ministers.

No date has been set for the Eurogroup meeting, and a European Commission spokesman said it would be held only when Greece had made a commitment to the deal.

Papademos said after five hours of talks on Sunday that party chiefs had agreed measures including wage cuts and other reforms as part of spending cuts worth 1.5 percent of gross domestic product.

But leaders of the PASOK socialist party, the conservative New Democracy and the far-right LAOS party still have to reach agreement on several unresolved issues.

These include labour market reform and shoring up domestic banks. Greece needs the bailout money by mid-March to meet big debt repayments but tempers are rising in the EU over what it sees as Greek dithering on implementing reforms.

Greeks have been worn down by a deep recession, now in its fifth year, and wave after wave of austerity measures imposed under the first bailout.

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The Australian dollar leapt to a six-month high but stocks turned negative after the central bank held rates steady at a review when markets had positioned for a rate cut.

Opinions were divided over whether the wrangling over Greece’s debt restructuring talks would eventually be resolved or trigger contagion across other vulnerable euro zone countries, tempering risk-taking investments.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose as much as 0.4 percent to its highest since September 1, then reversed direction, and last stood barely changed.

Australian shares were among the big losers, ending down 0.5 percent — having been up before the central bank’s afternoon decision to hold rates steady.

Financial spreadbetters expected Britain’s FTSE 100, Germany’s DAX and France’s CAC-40 to open flat.

Japan’s Nikkei average ended down 0.1 percent, slipping from a three-month high just shy of 9,000 hit on Monday.

“Concerns over the Greece issue are limiting real risk taking from investors, even if the environment generally appears to be improving,” said Tetsu Emori, a fund manager with Astramax Co. in Tokyo.

“I’d expect all concerned parties to eventually strike a deal because it is in nobody’s interest if Greece defaults. But a further delay in the debt talks will really hamper sentiment,” he said.

After resisting terms of a proposed new bailout deal which demands strict labour reforms and other austerity steps, Greek political leaders face crunch talks on Tuesday to clinch an agreement needed to avoid a debt default.

The full package must be approved by the euro zone, the European Central Bank and the International Monetary Fund before February 15 in order to complete legal procedures for a bond swap deal for a March 20 bond redemption.

Moreover, some euro zone countries require parliamentary approval to raise the bailout money.

RATE DIFFERENCES

The euro eased 0.2 percent to $1.3107, although it had recovered from an overnight low of $1.3026.

The single currency hit a new record low against the Australian dollar near A$1.2140, as wide interest rate differentials made the Aussie more attractive than the struggling euro.

The Australian dollar jumped more than one cent to a six-month high of $1.0812 after the Reserve Bank of Australia unexpectedly kept interest rates steady at 4.25 percent, although it kept the door open to an easing if conditions deteriorated.

“In the absence of a messy Greek default, there is nothing really at the moment that’s going to stop the Aussie from going and testing all-time highs,” said David Scutt, a trader at Arab Bank Australia. It hit a 30-year peak of $1.1081 in July.

The dollar was up 0.3 percent against the yen at 76.72. Data from Japan’s Finance Ministry on Tuesday confirmed that Tokyo conducted stealth foreign exchange intervention in October-December, even after a massive intervention on October 31 when the yen hit a record high around 75.31.

Commodities retreated with the dollar’s gain against a basket of major currencies.

U.S. crude futures eased after rising above $97 a barrel, while Brent slipped after trading above $116 a barrel.

Spot gold was up 0.1 percent to $1,722 an ounce, trimming gains made earlier on an initial modest rise in equities.

Asian credit markets remained subdued, with the spreads on the iTraxx Asia ex-Japan investment grade index little changed, after tightening sharply on Monday.

The ECB’s generous funding in December and expectations ahead of another such liquidity operation scheduled on February 29 sent three-month Euribor rates, a main gauge of unsecured interbank euro lending, to 1.094 percent on Monday, the lowest level in nearly a year.

Analysts expect consolidation in several equity markets which have recently climbed to near resistance levels, which may then pave the way for a break higher.

India’s main 30-share BSE index is expected to find

major resistance at an October peak of 17,908, after rising as high as 17,829 on Monday.

Shanghai shares fell below a key support of 2,300 on Tuesday. A fall below 2,240-50 will reset the downtrend, while a break above 2,360 points to an eventual move higher.

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Evangelos Venizelos added that a planned meeting by eurozone ministers on Greece originally scheduled for Monday would now be held on Wednesday.

“I will participate in a Eurogroup telephone conference at 1230 GMT” to discuss details of a rescue deal for Greece worth 130 billion euros ($171 billion) which officials have been trying to seal since October, the minister said in a statement.

“Critical issues pertaining to the country’s future remained open” after 12 hours of “tough” negotiations Friday with the European Union, International Monetary Fund and European Central Bank, he said.

The three organisations, which rescued Greece in 2010 with an earlier loan, are demanding further labour cost cuts which Greek unions are refusing to concede amid fears that they could worsen an already deep recession.

Venizelos will brief fellow cabinet ministers before another meeting with senior auditors from the EU, IMF and ECB, known locally as the ‘troika’, a finance ministry source said on Saturday.

The political coalition backing Greece’s interim government is strongly opposed to the troika’s demands for further civil servant cuts and to a reduction in the minimum wage, currently at 750 euros.

Prime Minister Lucas Papademos has reportedly threatened to resign if his coalition backers reject the demanded austerity measures.

The government spokesman on Friday declined to comment on the reports.

“I do not want to make such assumptions,” spokesman Pantelis Kapsis told Real FM radio. “I think the political leaders and the prime minister will jointly take the decisions on how we will proceed from now on.”

Representatives of private holders of Greek debt are also returning to Athens this weekend for more negotiations on a crucial writedown Greece needs to avoid sovereign default.

A spokesman for the Institute of International Finance, the global banking organisation leading the debt writedown talks, said in an email to AFP that IIF chief Charles Dallara and Jean Lemierre, adviser to French bank BNP Paribas, were headed to the Greek capital to continue the talks.

Greece has been negotiating for months to obtain debt relief under the so-called Private Sector Initiative as a condition for receiving a second international bailout from the EU and the IMF, agreed in October.

Eurozone governments and banks have both been playing hardball for weeks in their bid to reduce by at least half the 200 billion euros in privately held Greek debt. The country’s overall debt stands at 350 billion euros.

Papademos said in a statement Friday that Greece had nearly completed negotiations on the eurozone bailout which depends on the debt writedown.

“We are in the final phase of a very critical procedure to form Greece’s new economic programme and complete a loan deal that will lighten the load of the public debt and ensure the country’s financing for many years to come,” he said.

Pressure is mounting for Greece to strike a deal with private creditors.

The finance minister this week said an official offer to creditors must be made by February 15.

Athens faces debt repayments of 14.4 billion euros ($19 billion) on March 20.

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Greece, which is racing to complete talks with the EU and the IMF on a second bailout worth 130 billion euros, had previously estimated that the deficit would be above 9.5 percent of GDP.

“The numbers aren’t final yet but we believe the deficit will come in at between 9.1 and 9.4 percent (of GDP),” the official, who declined to be named, told Reuters.

The official said the smaller deficit was due mainly to the fact that Greece will raise about 2 billion euros from a controversial property tax the government imposed in September in a desperate move to plug fiscal gaps. That would beat a target of 1.7 billion euros.

A deficit of 9.1 to 9.4 percent of GDP would still be above initial EU/IMF targets but it might help Athens which, to secure the bailout, must persuade the European Union and the IMF – which have grown increasingly exasperated with its repeated failures to meet deficit and reform targets – that it will implement long-delayed reforms and slash spending further.

Another senior finance ministry official had said this week that the 2011 budget deficit would most likely be below 9.5 percent of GDP, but did not give more details.

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But the announcement that that 25 of 27 European Union nations had adopted the new pact on budgetary discipline was overshadowed by outrage over a German suggestion heavily indebted Greece submit its finances to EU review.

The idea of placing the cradle of European democracy under the supervision of an EU budget tsar quickly failed to gain traction at the summit in Brussels.

“There cannot be any talk of putting any nation under wardenship. It would not be reasonable, democratic and efficient,” French President Nicolas Sarkozy told a news conference.

Sarkozy said that German Chancellor Angela Merkel did not back the idea, suggesting the proposal came from others in her government.

Merkel, however, did not repudiate the controversial proposal which Greece’s education minister termed “the product of a sick imagination.”

“I think that in light of the discussions, which are often very emotional, it is important that we come to a conclusion” about the extent of the surveillance of Greece, she told reporters.

Greece is already essentially under supervision with European Commission, European Central Bank and International Monetary Fund auditors in Athens to ensure the government implements reforms in return for bailout loans.

Athens has been under constant pressure to implement drastic budget cuts and radical economic reforms in return for installments from a first €110-billion bailout it was granted in May 2010.

Merkel noted that a second €130-billion rescue package for Greece, which the eurozone hopes to finalise this week, was conditioned on some form of “surveillance that we are now thinking about how to make more efficient.”

Under the radical German proposal, a commissioner appointed by the 16 other eurozone finance ministers could veto budget decisions made by Athens.

“I am strongly against the idea of imposing a commissioner with that mission only to Greece. That’s not acceptable,” said Luxembourg Prime Minister Jean-Claude Juncker, chairman of the key group of eurozone finance ministers.

Calling the German proposal “vexing,” Austrian Chancellor Werner Faymann said it “doesn’t achieve anything and it goes in the wrong direction.”

However, the plan drew cautious support from Swedish Prime Minister Fredrik Reinfeldt, who complained that Greek authorities “are not delivering on reforms.” Dutch Prime Minister Mark Rutte echoed those sentiments: “Greece must also honour the commitments it has made with us.”

Merkel did not push this plan further, however, said it was about “how Europe can help Greece accomplish the tasks given to it.”

The EU focus on bailouts was supposed to give way at Monday’s summit to a renewed push to stimulate growth and create jobs across European economies.

This idea even saw tentative moves to place an ambitious free-trade deal with the United States on the coming agenda. But at its root was the announcement that 25 of 27 countries had adopted the new pact on budgetary discipline.

The Czech Republic joined Britain on the outside looking in, but a threat by Poland to withdraw evaporated after France gave ground in an argument about the influence of non-euro countries on eurozone summits.

Pushed by Germany and the ECB, the treaty – to be formally signed in March – will require governments to introduce laws on balanced budgets and impose near automatic sanctions on countries that violate deficit rules.

Only those countries that sign up will be able to access bailout aid from a new rescue fund whose legal basis was also ticked off at the talks. It will enter force after 12 nations ratify it.

The pact is a “first step toward a fiscal union,” said European Central Bank chief Mario Draghi amid hopes among some governments that the pact will prompt the ECB to step up a controversial bond purchase programme.

With Italy and Spain still fragile, EU leaders will discuss in March whether to add half as much again to a new rescue fund’s initial €500-billion size, amid wider moves to beef up IMF resources.

“We are getting the feeling that there is a shift in Germany’s position and I am optimistic,” said Italian premier Mario Monti.

European Commission chief Jose Manuel Barroso said €82 billion of unspent EU funds could kick-start growth and job creation – but with the catch that money is matched locally.

Among ideas adopted by the summit for boosting growth in Europe, there were calls to lower the tax burden on employers to get more people hired, and give all young people guaranteed options in work, training or study.

However, a summit statement concluded: “There are no quick fixes. Our action must be determined, persistent and broad-based.”

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The idea, floated by Berlin, to strip the government in Athens of its sovereignty and give the power to make decisions on finances to a special EU commissioner, opened up clear fault-lines both within and outside the eurozone.

It could ultimately place in doubt Greece’s second bailout, agreed in October but bogged down amid a series of new conditions.

German Chancellor Angela Merkel and Greek Prime Minister Lucas Papademos arrived around half an hour before the European Union’s first summit of the year began shortly after 1400 GMT.

Merkel preferred not to make a big deal of plans circulated to finance ministry officials on Friday.

Without pulling back on the subject, she said the debate should now be about “how Europe can help Greece accomplish the tasks given to it.”

Papademos then walked through the leaders’ entrance without saying a word.

But the proposal — termed “the product of a sick imagination” by a Greek minister on Saturday after the plan was leaked — was slammed by Luxembourg Prime Minister Jean-Claude Juncker.

“I am strongly against the idea of imposing a commissioner with that mission only to Greece. That’s not acceptable,” said Juncker, who chairs the key grouping of eurozone finance ministers.

Austrian Chancellor Werner Faymann also said the German proposal “doesn’t achieve anything and it goes in the wrong direction.”

However, the German plan drew what looked like solid if cautious support from Swedish Prime Minister Fredrik Reinfeldt.

“They are not delivering on reforms,” he said of Greece and EU frustration with broken promises.

“Which is why we are having this discussion,” he said.

“I can understand that.”

Dutch Prime Minister Mark Rutte would not comment on “another country’s” proposal, but echoed that Greece can not expect to receive bailout aid without making sacrifices.

“Greece must also honour the commitments it has made with us,” he said.

Greece has been promised a second bailout of 130 million euros ($171 million).

But at the weekend, German Finance Minister Wolfgang Schaeuble told the Wall Street Journal that “unless Greece implements the necessary decisions and doesn’t just announce them … there’s no amount of money that can solve the problem.”

With the country buried under a mountain of debt, Greece is seeking to wrap up a deal with private investors that have been asked to take a “haircut” worth about half the 200 billion euros owed to them.

The EU had wanted to use its New Year gathering to send out a message of optimism.

EU President Herman Van Rompuy said on Twitter that Monday’s talks, held amid a general strike over EU-ordered austerity for host country Belgium, would open up a “path to hope.”

Later, leaders were to agree a German-driven pact to toughen fiscal discipline, despite Polish demands revealing new tensions.

They could point to an improved economic confidence survey and another successful debt auction for Italy.

But stocks slid awaiting news on Greece, and Spain plunged quicker into what Brussels deems a “moderate” recession looming large over Europe.

Leaders, some facing imminent re-election campaigning, must contend with an unemployment rate averaging 10 percent across the 17-nation eurozone.

Ideas include lowering the tax burden on employers to get more people hired, and giving all youths guaranteed options in work, training or study.

Britain opted out of the new “fiscal compact” in December, and Polish Prime Minister Donald Tusk said Monday that Warsaw is thinking again.

“We will not accept it in its present form,” said Tusk, who wants non-euro governments to be given a bigger say in eurozone economic governance, which France rejects.

A discussion about whether to increase the size of a new permanent rescue fund from July, the European Stability Mechanism (ESM), is to wait until March.

This new “firewall” is planned to have firepower worth 500 billion euros, but may be raised to 750 billion euros.

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The debate must be on “how Europe can help Greece accomplish the tasks given to it,” Merkel said on arrival at an EU summit after Greek officials and some European leaders rejected the proposal.

“But all of this will only work if Greece and other (EU) member states talk about it. This is why I do not want a controversial debate but a discussion that achieves success,” she said.

The German suggestion to put Greece under stewardship cast a shadow over the summit which is aimed at sealing a fiscal pact to toughen budget discipline across the EU, finalising a rescue fund and finding ways to counter recession.

The idea that Greece might cede budget control to the EU was contained in a German submission to its eurozone partners first revealed late Friday by the Financial Times and confirmed by European sources.

Under the radical plan, denounced by Greek officials, a commissioner appointed by the 16 other eurozone finance ministers could veto budget decisions made by Athens.

German Economy Minister Philipp Rösler earlier on Monday had backed beefed-up EU monitoring of Greece on Monday.

Rösler, who is also Germany’s vice chancellor, told the daily Bild that the European Union should step in to ensure that Greece toes the line of budget austerity as it struggles to emerge from a crippling debt crisis.

“We need more leadership and monitoring in implementing the course of reform (in Greece),” he was quoted as saying. “If the Greeks fail to do this themselves, the leadership and monitoring must come in a stronger way from outside, for example via the EU.”

Rösler said that patience in Germany, the paymaster for the eurozone’s bailouts, for Greece was wearing thin.

“Time is running out,” he said. “There can only be more assistance if the Greek government finally carries out the necessary reforms. The Greeks must finally send a clear message that they mean what they say,” he added.

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London’s top share index <.FTSE> was down 0.8 percent at 5,685.09 points at 0900 GMT, adding to Friday’s losses and retreating further from a six-month closing peak of 5,795.20 set on Thursday.

Banks <.FTNMX8350> — which has started 2012 on a strong footing after a lacklustre 2011 — were the top fallers on Monday, on concern that extra liquidity injections from the central banks have not fixed the sector’s fundamental problems.

Barclays and Lloyds each lost around 2.4 percent.

“Banks continue to remain very wary of lending to each other, so the banking sector crisis has not been resolved,” Jeremy Batstone-Carr, head of research at Charles Stanley, said.

“Perhaps it was a little bit premature to dash into risk and a cautious approach is best.”

Miners <.FTNMX1770> also moved into the red, with Evraz down 3 percent as metal prices pulled back and last week’s softer-than-expected U.S. economic data fuelled concerns about this year’s demand levels.

With no major UK data due, investors’ focus was firmly on Brussels, where EU leaders meet at 2 p.m. to sign off a permanent euro zone rescue fund at a summit expected to be overshadowed by unresolved Greek debt problems.

To avoid a chaotic default — which could have grave ramifications for sentiment and financial systems across the globe — Greece must secure a deal with its private bond holders and persuade international lenders that it is serious about reforms in order to secure much-needed cash.

An agreement with private bond holders appears to be close, but investors — who had hoped for a deal a week ago — are likely to remain in a cautious mood until it is finalised.

“The uncertainty about the near term fiscal outlook for Greece is here to stay. In this regard, today’s EU summit could fail to lastingly appease investors’ concerns,” JPMorgan’s analysts said in a research note.

Fresh tensions between Greece and the euro zone’s biggest economy Germany over the weekend are unlikely to help sentiment, while problems are also seen in other euro zone nations.

Fitch downgraded the sovereign credit ratings of Belgium, Cyprus, Italy, Slovenia and Spain on Friday, while investors have been ditching Portugal’s stocks and bonds in the belief it will need a second bailout.

Higher euro zone government bond yields ahead of a 10-year Italian debt auction, and a weaker euro chimed in with a picture of heightened concerns about the euro zone.

For the FTSE, the charts also pointed downwards.

“Technical indicators are hinting an overbought market and the possibility of a downside movement in the coming sessions,” Guardian Stockbrokers said in a note, highlighting support levels at 5,590 and 5,520.

On the upside, mid-sized British pharmaceutical firm BTG rallied nearly 5 percent after announcing that the first of two U.S. trials of its varicose vein treatment Varisolve had met all its end-points, bringing a launch of the long-delayed product a step closer.

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Rösler, who is also Germany’s vice chancellor, told the daily Bild that the European Union should step in to ensure that Greece toes the line of budget austerity as it struggles to emerge from a crippling debt crisis.

“We need more leadership and monitoring in implementing the course of reform (in Greece),” he was quoted as saying. “If the Greeks fail to do this themselves, the leadership and monitoring must come in a stronger way from outside, for example via the EU.”

The idea that Greece might cede control over its budget to the EU was contained in a German submission to its eurozone partners revealed late on Friday by the Financial Times and confirmed by European sources.

Under the radical plan, a commissioner appointed by finance ministers from the other 16 eurozone states would be able to veto budget decisions made by Athens.

The scheme emerged ahead of an EU summit in Brussels on Monday focused on a new fiscal pact to restore budgetary discipline and the confidence of the markets in the crisis-wracked bloc.

Greece angrily rejected the bid Saturday, with Education Minister and former EU commissioner Anna Diamantopoulou calling the notion “the product of a sick imagination.”

The European Commission also said there was no question of Athens surrendering budgetary control.

Roesler said that patience in Germany, the paymaster for the eurozone’s bailouts, for Greece was wearing thin.

“Time is running out,” he said. “There can only be more assistance if the Greek government finally carries out the necessary reforms. The Greeks must finally send a clear message that they mean what they say,” he added.

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