European leaders at a summit in Brussels said a final debt deal could be signed off in the coming days, together with a second multibillion-euro bailout package designed to save the country from a potentially disastrous bankruptcy.
The leaders meeting in Brussels will likely focus on how to stimulate economic growth and create jobs at a time when huge government spending cuts threaten to push many countries back into recession.
Latest data showed that Spain was one step closer to recession — technically defined as two consecutive quarters of economic contraction — after its economy shrank in the last three months of 2011.
Experts say Europe's efforts to cut its high levels of debt will be for nothing if its economies remain uncompetitive. The leaders will also discuss a new treaty on tightening budget controls and setting up a permanent bailout fund.
But the meeting will be dominated by another topic that is not officially for discussion — Greece's debt problem.
Greece is said to be close to a deal with its private creditors that could avert a disastrous default this spring. Investors holding euro206 billion ($272 billion) in Greek bonds would exchange them for bonds with half the face value. The replacement bonds would have a longer maturity and pay a lower interest rate. When the bonds mature, Greece would have to pay its bondholders only euro103 billion.
However, a person familiar with the negotiations to slash Greece's massive debt says private creditors participating in the deal would face an overall loss on their bondholdings of around 70 percent.
Athens and representatives of banks and other investment funds holding Greek government bonds over the weekend came close to a final deal designed to make Greece's debt sustainable. That is a precondition for further bailout money for Greece from the eurozone and the International Monetary Fund.
The person said Monday that the 70 percent loss was produced by cutting the bonds' face value in half, reducing the average interest rate to less than 4 percent and pushing repayment of the bonds decades into the future.
The person spoke on condition of anonymity because the talks are confidential.
Some experts also fear that Greece could need more rescue loans from its bailout partners — other eurozone countries and the International Monetary Fund — if it is to remain solvent because it has been in recession for years.
Richer countries like Germany, however, are losing patience with giving Athens loans, saying the Greek government is not implementing reforms and austerity cuts quickly enough.
A German official even proposed to have an EU official directly oversee Athens' government spending. The idea was quickly rejected, however, by the European Commission and Greek leaders initially as well as by German Chancellor Angela Merkel at the summit on Monday.
Despite progress in Greece's debt talks with private creditors, the continued uncertainty over its finances pushed markets lower Monday.
Britain's FTSE 100 fell 1.2 percent to 5,664.19 and Germany's DAX lost 1.3 percent to 6,430.16. France's CAC-40 shed 1.4 percent to 3,272.71. Wall Street also fell on the open, with the Dow Jones industrial average falling 0.8 percent to 12,554 and the S&P 500 was down 0.9 percent to 1,303.
Sentiment, which has been relatively buoyant so far this year on hopes for a recovery in the U.S., was also dented by Fitch Ratings agency's announcement late Friday that it had downgraded five eurozone countries, including Italy and Spain.
A bond auction by Italy saw the country's borrowing rates drop, though demand was modest, while corporate were unremarkable — airline Ryanair beat expectations but electronics giant Philips disappointed.