Merkel sets strict terms for Greek aid, Juncker flags EU cash

By Renee Maltezou and Alastair Macdonald

BRUSSELS (Reuters) - European Union leaders welcomed a pledge on Friday from Greece to meet creditors' demands for a broad package of economic reform proposals within days to unlock the cash Athens needs to avoid stumbling out of the euro zone.

After overnight crisis talks on the sidelines of an EU summit in Brussels, new Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel, the bloc's main paymaster, offered somewhat divergent understandings of how much Athens must do and how quickly. But EU officials insisted there was a broad agreement to act now on an accord struck a month ago.

Merkel said Greece, which faces a cash crunch within weeks, would receive fresh funds only once its creditors approve the comprehensive list of reforms Tsipras promised to present soon.

But she signaled some flexibility on what reforms Tsipras would have to make -- crucially giving his leftist-led coalition the chance to offer alternative savings strategies that will help it persuade its voters it is breaking with what Tsipras calls the failed austerity policies of his defeated predecessor.

And European Commission President Jean-Claude Juncker offered Tsipras a sweetener by saying 2 billion euros from the European Union's modest collective budget were available to ease the humanitarian impact of five years of spending cuts.

Tsipras said he would fully respect a deal struck with euro zone finance ministers on Feb. 20 that extended an EU bailout deal until June. But he insisted that a condition in that pact requiring Athens to pass a final review of its efforts to bring its debts under control before receiving funds did not apply.

After two months of mounting frustration on both sides, marked by public squabbling, Tsipras held three hours of talks with the leaders of Germany, France and the main EU institutions to try to break an impasse that risks depriving Athens of the euros it needs to function fully within the currency area.

A joint statement by the EU institutions spoke of a "spirit of mutual trust". But it remained uncertain Tsipras and Merkel were talking about the same reforms, and how far Greece would have to start implementing them before it receives any new cash.

DIVERGENT TAKES

The risk of a continued standoff, exactly a month after Greece secured a last-gasp four-month extension of an EU/IMF bailout, was highlighted by comments from Merkel and Tsipras.

"The agreement of Feb. 20 is still valid in its entirety. Every paragraph of the agreement counts," Merkel told German journalists who questioned whether she was now offering cash for promises that many of her supporters have stopped believing in.

Tsipras appeared to differ. "It is clear that Greece is not obliged to implement recessionary measures," he said. "Greece will submit its own structural reforms which it will implement."

Merkel insisted only the completion of approved measures -- in a final review by creditor institutions -- would satisfy lenders including the Euro Group of euro zone finance ministers.

"The Greek government has the possibility of replacing individual reforms outstanding from Dec. 10 with other reforms, if these ... have the same effect. The institutions and then the Euro Group must decide whether they do have the same effect," she said, noting Ireland had made such changes with EU backing.

Tsipras, however, insisted that while his government would fully respect a deal struck with the euro zone on Feb. 20 it would not have to complete a final bailout review process begun by the last government to secure more aid: "We all have the same reading of the Feb. 20 accord... There is no such thing as a fifth review," he told a news conference after the summit.

EU officials, keen to play up the prospects the talks had raised of preventing "Grexit", or an inadvertent "Grexident" that pushed Greece out of the euro, said differences were merely ones of emphasis for audiences in their respective countries.

Sources aware of how the three hours of talks overnight had gone said Tsipras, aged 40 and only two months into his first ever government job, had quickly appeared to accept that he was facing a united front from creditors and would have no choice but to meet their impatient demands for cost-cutting measures.

"He has seen ... that he cannot divide the Europeans," one senior EU official said. "He can only work with them, not play them off against each other. He has also seen that there is goodwill if he sticks to his word and actually delivers."

Another EU official said Tsipras, who will visit Merkel in Berlin on Monday after weeks of increasingly rancorous relations between ministers in their two cabinets, had indicated he could offer a full package of reforms within a week or 10 days.

Nonetheless, with some German leaders saying they might prefer Greece out of the euro zone, and Tsipras trying to satisfy a coalition of radicals unused to power, senior EU officials do not rule out a further collapse of the process.

Crucial for the Greek leader, EU officials believe, is being able to present his package as a break with his conservative predecessor -- even if many of the measures are broadly similar.

APPOINTMENT IN BERLIN

Tsipras said he had no deadline for submitting the comprehensive list of reforms and insisted Greece faced no short-term liquidity problem, contradicting comments by EU officials that Athens could run out of money in mid-April.

Asked whether Greek demands for reparations for the World War Two Nazi occupation would be on the agenda on Monday, Merkel said Berlin had addressed the issue in the past but she was keen to discuss bilateral German assistance programs for Greece.

EU officials said that if Athens came up with a convincing plan, the Euro Group could meet as early as next week to release at least some funds. Merkel too said Greece could get some payment sooner if it fulfilled the requirements faster.

Greece is pressing in particular to receive 1.9 billion euros in profits that the European Central Bank made last year on its holdings of Greek government bonds.

The Greek Finance Ministry said it would respond in a "constructive spirit" to a list of requirements on reforms being drawn up by a team of technical experts from the creditors -- a contrast to an atmosphere of mutual mistrust and hostility which marked encounters with EU officials in Athens this week.

Finance Minister Yanis Varoufakis, whose comments and behavior have offended many of Greece's partners, especially Germany, joined the call for immediate implementation of the Feb. 20 extension agreement.

"First, we should work towards ending the toxic ‘blame game’ and the moralizing finger-pointing which benefit only the enemies of Europe," he said in a blog post on Friday.

The meeting involved Tsipras, Merkel, Juncker, summit chairman Donald Tusk, Euro Group chair Jeroen Dijsselbloem, ECB President Mario Draghi and French President Francois Hollande.

In a statement, Juncker, Tusk and Dijsselbloem said: "The Greek authorities will have the ownership of the reforms and will present a full list of specific reforms in the next days."

Following the talks, the main Greek stock index rose 3.2 percent. Two-year Greek government bond yields fell 89 basis points to 23.85 percent. Two-year yields have doubled in a month and had risen over 3 percentage points on Thursday.

(Additional reporting by Philip Blenkinsop, Robert-Jan Bartunekk Jan Strupczewski, Paul Taylor, Tom Koerkemeier, Andreas Rinke, Elizabeth Pineau, Adrian Croft, Francesco Guarascio, Foo Yun Chee and Robin Emmott in Brussels, Michele Martin and Gernot Heller in Berlin and Costas Pitas and Deepa Babington in Athens; Writing by Alastair Macdonald and Paul Taylor; Editing by Paul Taylor and David Stamp)