Exclusive: National Security Agency helps banks battle hackers (Reuters)

WASHINGTON (Reuters) – The National Security Agency, a secretive arm of the U.S. military, has begun providing Wall Street banks with intelligence on foreign hackers, a sign of growing U.S. fears of financial sabotage.

The assistance from the agency that conducts electronic spying overseas is part of an effort by American banks and other financial firms to get help from the U.S. military and private defense contractors to fend off cyber attacks, according to interviews with U.S. officials, security experts and defense industry executives.

The Federal Bureau of Investigation has also warned banks of particular threats amid concerns that hackers could potentially exploit security vulnerabilities to wreak havoc across global markets and cause economic mayhem.

While government and private sector security sources are reluctant to discuss specific lines of investigations, they paint worst-case scenarios of hackers ensconcing themselves inside a bank's network to disable trading systems for stocks, bonds and currencies, trigger flash crashes, initiate large transfers of funds or turn off all ATM machines.

It is unclear if hackers have ever been close to producing anything as dire, but the FBI says it has already helped banks avert several major cyber attacks by helping identify network vulnerabilities.

NSA Director Keith Alexander, who runs the U.S. military's cyber operations, told Reuters the agency is currently talking to financial firms about sharing electronic information on malicious software, possibly by expanding a pilot program through which it offers similar data to the defense industry. He did not provide further details on his agency's collaboration with banks.

Alexander said industry and government were making progress in protecting computer networks, but "tremendous vulnerabilities" remained. The four-star Army general noted companies that have suffered damage from hackers, such as Google Inc, Lockheed Martin Corp and Nasdaq OMX Group, had among the best security systems in the world.

"If they're getting exploited, what about the rest? We have to change that paradigm," Alexander said.

NSA, which has long been charged with protecting classified government networks from attack, is already working with Nasdaq to beef up its defenses after hackers infiltrated its computer systems last year and installed malicious software that allowed them to spy on the directors of publicly held companies. A Nasdaq spokesman confirmed the investigation into the attack continues, but declined to give further details.

OFFICIALS WORRIED

Hackers have targeted Wall Street investment banks for more than a decade, but recent attacks have been more sophisticated, coordinated and deliberate.

That makes security experts suspect the hackers were backed by countries such as China, and fueled concerns that cyber terrorists might someday use malware to wipe out crucial data and cripple networks across the financial sector.

China has repeatedly said it does not condone hacking, but experts say the evidence continues to mount against Beijing. In June, Google blamed China for an attempt to steal the passwords of hundreds of email account holders, the second major breach the Internet giant has blamed on the Chinese.

Earlier this year, security firm McAfee said hackers working in China broke into the computer systems of five global oil and gas companies to steal bidding plans and other critical proprietary information.

"We know adversaries have full unfettered access to certain networks," Shawn Henry, executive assistant director of the FBI, said without identifying the adversaries.

"Once there, they have the ability to destroy data," he said in an interview. "We see that as a credible threat to all sectors, but specifically the financial services sector."

The FBI has helped banks avert several potential attacks by alerting them to vulnerabilities in their computer networks, and by flagging possible hackers before they struck, he said.

Security experts interviewed by Reuters declined to identify any banks that may have data compromised, citing promises of confidentiality to clients, colleagues and employers that they would not to discuss the matter publicly.

Representatives of Wall Street's biggest banks including Bank of America Corp, Citigroup Inc, Goldman Sachs Group Inc and JPMorgan Chase & Co either declined to discuss security issues or were not available to comment.

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APNewsBreak: Banks nowhere near deal on Greece (AP)

By GABRIELE STEINHAUSER, AP Business Writer Gabriele Steinhauser, Ap Business Writer – 1?hr?14?mins?ago

BRUSSELS – A top bank lobbyist insisted Saturday that banks and the eurozone are far from reaching a deal to cut Greece's debt, despite claims by eurozone finance ministers that they will ask banks to take steeper losses on their Greek bonds.

Although the ministers did not say how much of a cut they are aiming for, a report from Greece's international debt inspectors suggested that the value of Greece's bonds may have to be slashed as much as 60 percent to get the country solvent enough to repay its debt.

The ministers on Saturday sent their chief negotiator, Vittorio Grilli, to re-start discussions with banks and other private investors on a new deal for Greece.

However, Charles Dallara, the managing director of the Institute of International Finance, who has been leading the negotiations for the banks, said in an interview with The Associated Press that an agreement remained elusive.

"We're nowhere near a deal," he said.

Banks in July agreed to accept losses of about 21 percent on their Greek bonds. However, eurozone leaders have since reopened the deal and Greece's international debt inspectors — the so-called troika of the European Commission, the European Central Bank and the International Monetary Fund — say Greece's economic situation has deteriorated dramatically since the summer.

In a report Friday, the inspectors said that under the July deal, Greece would need an extra euro252 billion ($347 billion) in loans from the eurozone and the IMF — on top of the euro110 billion ($152 billion) it has been relying on to pay bills since May 2010.

But Dallara said new plans to slash Greece debt would still leave the country as "a ward of Europe" for years.

He declined to say how much in losses banks would be willing to accept, saying only "we would be open to an approach that involves additional efforts from everyone."

Dallara was in Brussels, where eurozone finance ministers have been meeting for two days of talks.

The eurozone has been working to reach a voluntary agreement with banks, rather than forcing losses onto the lenders, because that could avoid triggering billions of euros on payout for bond insurance and could destabilize markets even further. However, in recent weeks some officials have no longer insisted that the deal remain voluntary.

Earlier Saturday, a European official said the EU was on track to agree on forcing banks to raise just over euro100 billion ($140 billion) to ensure they have enough cushion to weather further losses on their Greek bonds as well as market turmoil.

The official spoke on condition of anonymity because the discussions the deal was supposed to be unveiled by EU leaders at their summit Sunday.

"We have made real progress and have come to important decisions on strengthening European banks," George Osborne, Britain's chancellor of the exchequer, said as he left Saturday's meeting. Osborne did not say what the decision was.

Strengthening banks and slashing Greece's debts are critical to solving Europe's crisis, which is now threatening to engulf larger economies like Italy and Spain and is blamed for dampening growth across Europe and even the world.

The euro100 billion figure is likely to disappoint some analysts, although it was above recent press reports. A report by the International Monetary Fund has called for up to euro200 billion ($280 billion) to be poured into banks.

The new rules would force systemically important banks to raise their core capital ratios to 9 percent, compared with just 5 percent to 6 percent they needed to pass EU stress tests this summer. The ratio measures the amount of capital banks hold compared to their risky assets.

Despite that significant progress, agreement on arguably the most important measure has remained elusive to eurozone leaders: boosting the firepower of the currency union's euro440 billion ($600 billion) bailout fund to keep the crisis from spreading.

Increasing the effectiveness of the fund — called the European Financial Stability Facility — is meant to help prevent larger economies like Italy and Spain from being unable to afford to borrow money from markets. That's exactly what happened to Greece, Portugal and Ireland and why those three EU countries needed bailouts.

Germany and France still disagree over how to do that and failed to make much progress on that front Friday night. German Chancellor Angela Merkel and French President Nicolas Sarkozy are meeting Saturday evening in the hopes of moving toward a deal.

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Europe eyes bolstering banks ahead of debt storm (Reuters)

DUBLIN/FRANKFURT (Reuters) – European banks may need more than 100 billion euros ($135 billion) to withstand the sovereign debt crisis, Ireland estimated on Saturday ahead of a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy to work out how to recapitalize the lenders.

The falling value of banks' holdings of government debt from Greece and other euro zone periphery states has already prompted the implosion of Belgian lender Dexia, adding urgency to the Merkel-Sarkozy talks on the crisis.

Germany and France have so far been split over how to strengthen shaky lenders and fight financial market contagion that may follow a possible Greek default.

Paris is keen to tap the euro zone's 400 billion rescue fund, the EFSF, to recapitalize its own banks, while Berlin is insisting the fund should be used as a last resort.

The International Monetary Fund (IMF) has said European banks need 200 billion euros in additional funds.

Irish Finance Minister Michael Noonan said the capital needed to bolster banks cushions was likely to come from a variety of sources but the bill would be large.

"I think there is general agreement that it will be significantly in excess of 100 billion (euros)," Noonan told reporters on the sidelines of an economic forum in Dublin.

"I know that some of the big German banks that I was talking to personally intend raising money on the market so it will be private funding. Other banks would like to avail of the EFSF fund. Other banks will rely on their sovereign governments to provide the capital so there is going to be a range of ways of doing it," he said.

Regulators worry that forcing a raft of major lenders to take state aid would not be the best use of Europe's capital resources, while banks fear than singling out only some lenders for extra support could heighten market worries about weaknesses at individual banks.

German newspaper Frankfurter Allgemeine Zeitung on Saturday cited financial sources as saying France's five-biggest lenders would agree to take 10-15 billion euros in funding from the French state but also wanted to see Germany's No. 1 lender Deutsche Bank plump its capital cushion.

Deutsche Bank Chief Executive Josef Ackermann is against any role for the state in his own bank's capital position and has ruled out a capital increase.

A Deutsche Bank spokesman on Saturday referred to Ackermann's long-standing public position and declined further comment.

Sarkozy is due to arrive in Berlin late on Sunday afternoon and hold a working dinner with Merkel in the evening, amid signs that conditions for resolving the crisis are getting no easier.

Slovakia's coalition government was in deadlock on Saturday over talks on ratifying a strengthening of the EFSF rescue fund, with a junior party insisting on conditions for its support.

Euro zone minnows Slovakia and Malta are the last countries holding up expansion of the EFSF mandate, which is needed to fight the sovereign debt crisis.

Meanwhile, Greece's representative at the IMF said the country's borrowing needs will be higher than currently projected due to a tougher-than-expected recession and the outcome of a debt agreement with private sector creditors.

"This financing gap will have to be covered either by increasing the 109 billion euro loan agreed on July 21 or through a restructuring of private debt," Panagiotis Roumeliotis said in an interview in financial daily Imerisia.

EU leaders agreed in July to provide Greece with a second bailout of more than 109 billion euros to help the country service its debt through to 2020. ($1 = 0.741 Euros)

(Reporting by Jonathan Gould, Sarah Marsh, Carmel Crimmins, Lorraine Turner, Christian Plumb, Philip Blenkinsop and Andreas Rinke; Editing by Alison Birrane)

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Central banks expand dollar operations (Reuters)

FRANKFURT (Reuters) – Major central banks around the world will cooperate to offer three-month U.S. dollar loans to commercial banks in order to prevent money markets from freezing up in the wake of Europe's sovereign debt crisis.

The European Central Bank said on Thursday it would hold three fixed-rate operations between October and December to provide banks as many dollars as they needed, in order to ease any funding crunch over the year-end.

"The European Central Bank has decided, in coordination with the (U.S.) Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three U.S. dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year," the ECB said.

The announcement sharply boosted European bank shares and the euro. Shares in French bank BNP Paribas climbed as much as 22 percent from the previous day's close before ending 13 percent higher.

Some banks are finding it hard to obtain dollar funding for periods of longer than a few days as U.S. money market funds and other traditional dollar lenders become increasingly nervous about the threat of a Greek debt default, which could destabilize markets throughout the region. European bank stocks have lost a third of their value since July.

"This is a very welcome decision," Silvio Peruzzo, economist at RBS, said of the ECB's announcement.

"Market reaction is strong given the news in recent days that some big banks are struggling to get funding. This eases many funding concerns that there are regarding many European banks."

SIMULTANEOUS

The British and Swiss central banks said they would conduct three-month dollar lending operations simultaneously with the ECB on October 12, November 9 and December 7. The Bank of Japan, which already holds three-month dollar tenders, will add one on October 18.

The Fed, which in the past has faced criticism from lawmakers in Washington for its role in rescue efforts for European banks, will not itself offer three-month loans to banks in the United States. But it maintains dollar swap lines with the ECB and other central banks to ensure they can obtain additional supplies of dollars when needed.

The ECB already offers seven-day dollar loans every week. Two unidentified banks tapped this funding on Wednesday, borrowing a total of $575 million. It was the second time in a month that the facility was used; previously, it had not been tapped since February.

At the height of the global financial crisis in 2008-09, the ECB regularly held three-month dollar operations, before calmer conditions allowed it to phase them out. It held a one-off, three-month operation in May 2010 around the time of Greece's first international bailout.

(Editing by Andrew Torchia)

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Regulator to sue major banks over mortgages (Reuters)

By Margaret Chadbourn and Jonathan Stempel Margaret Chadbourn And Jonathan Stempel – 1?hr?59?mins?ago

WASHINGTON/NEW YORK (Reuters) – A U.S. regulator will soon file lawsuits against major banks accusing them of bundling subprime home loans into bonds that never should have been sold to investors and causing mortgage giants Fannie Mae and Freddie Mac to lose billions, according to a source familiar with the matter.

The lawsuits by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, will deepen the mortgage litigation morass for banks. A spokeswoman for the regulator declined to comment on the pending lawsuits.

The biggest banks are negotiating with all 50 state attorneys general to address mortgage abuses. The banks are looking for a comprehensive settlement that will protect them from future litigation.

Major banks including Bank of America Corp and JPMorgan Chase & Co already face potential payouts of tens of billions of dollars to settle regulatory charges of abusive mortgage lending and foreclosure practices, and other investor lawsuits over mortgage debt losses.

These payouts would reduce earnings and weaken capital levels, perhaps harming the ability of banks to lend money and provide much-needed life to a stalled housing market and weakened economy.

The source declined to name the banks to be sued by the FHFA, but The New York Times reported that they include Bank of America, JPMorgan, Deutsche Bank, Goldman Sachs Group Inc and others. Representatives of those banks declined to comment.

The banks have been walloped by mortgage losses, but so have Fannie Mae and Freddie Mac, which are under government conservatorship after having previously been owned by public shareholders. The two entities guarantee bonds backed by mortgages and are a crucial pillar for the U.S. housing finance system.

The FHFA is charged with protecting Fannie Mae and Freddie Mac's assets. The lawsuits are part of the efforts of the acting FHFA director, Edward DeMarco, to protect taxpayer funds and would aim to recover billions of dollars which the two government-sponsored enterprises have lost from subprime mortgage bonds, according to another source familiar with the matter.

A BLIZZARD

The blizzard of litigation against banks is hurting share prices in the sector because investors feel unable to estimate with any certainty the ultimate scope of a given bank's legal liabilities.

Bank of America, for example, had intended its proposed $8.5 billion settlement in June with investors in Countrywide mortgage securities to resolve most litigation tied to its disastrous 2008 takeover of that home loan provider.

But many parties are objecting to that settlement, and the deal didn't stop the insurer American International Group Inc from suing Bank of America for $10 billion over its own alleged mortgage securities losses.

Nor did it stop Nevada's attorney general from threatening to withdraw from an $8.4 billion nationwide settlement with the bank. The AG now wants to sue the bank, accusing it of reneging on promises to modify mortgages.

Other banks also face mortgage lawsuits. In May, for example, the U.S. Justice Department sued Deutsche Bank, accusing it of misleading a U.S. housing agency into believing loans it made qualified for federal insurance.

The FHFA's lawsuits would follow an initial lawsuit in July against UBS AG seeking to recover $900 million of losses incurred on $4.5 billion of debt.

The New York Times reported that the FHFA is set to file lawsuits against major banks by Tuesday, before a three-year deadline to file cases expires.

FHFA and various investors have alleged that banks packaged residential home loans into securities sold to investors, after having failed to conduct adequate due diligence, and hiding or misstating the quality of the underlying loans and underwriting, as well as borrowers' ability to make payments.

As more borrowers fell behind or went into foreclosure, the value of securities backed by their loans fell, causing losses for investors.

According to The New York Times, Fannie Mae and Freddie Mac lost more than $30 billion, in part as a result of these securities.

Banks have argued in other cases that it was the market rather than their own activity that was responsible for much of the investors' losses.

As in the AIG lawsuit, the banks have also sometimes claimed that the investors suing them were sophisticated enough to know the debt they bought had the risks that came to pass.

Losses stemming from the precipitous deterioration in subprime and other mortgages pushed the government to take over Fannie and Freddie on September 7, 2008. Since then, taxpayers have spent more than $140 billion to keep the firms afloat.

(Reporting by Margaret Chadbourn in Washington and Jonathan Stempel in New York; Editing by Dan Wilchins, Matthew Lewis and John Wallace)

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AIG may replace banks in next share offer (Reuters)

PHILADELPHIA (Reuters) – American International Group plans to replace one or more Wall Street banks in its next sale of shares from the U.S. government, The Wall Street Journal reported on Sunday.

AIG has not yet decided which investment banks it would cut, but it plans to make changes in the lead underwriters before the next share sale later this year, Chief Executive Robert Benmosche told the newspaper.

Benmosche was disappointed in the bank's efforts to drum up interest in the previous offering, the newspaper said.

Only one or two of the four lead firms will change in the lineup, the report said. Some bankers have contacted AIG in an effort to protect the assignment, it said.

AIG's recent share offering was led by Bank of America Corp, Deutsche Bank AG, Goldman Sachs Group Inc and J.P. Morgan Chase.

(Reporting by Jessica Hall; Editing by Vinu Pilakkott)

(For more M&A news and our DealZone blog, go to http://www.reuters.com/investing/news/mergers)

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Banks meet to thrash out Greece aid plan (Reuters)

LONDON/PARIS (Reuters) – International banks and insurers will meet on Wednesday to thrash out a plan for the private sector to contribute to Greece's bailout effort as fears grow that the proposal will be derailed.

The Institute of International Finance (IIF) lobby group said it will chair the meeting of private-sector creditors.

It needs to resolve how a deal can get past credit rating agencies without it being termed a default, and how accountants will deal with it.

A lot of work remains to be done and Wednesday's meeting will not be decisive, several sources said.

"It's a process. The new French finance minister said today it will take weeks, over the summer. It's complex. It can't be settled overnight," a French private sector source involved in the talks said.

He said there was unlikely to be a single "one-size-fits-all solution" but rather several options, given the number of different bondholders and stakeholders involved.

"The issue is so complex that we need more time," a German banking industry source added.

French banks, major holders of Greek sovereign debt, have proposed voluntarily renewing Greek bonds when they fall due. Bondholders would reinvest at least 70 percent of the proceeds from bonds maturing between now and the end of 2014 in new 30-year Greek debt.

The Financial Times said a new proposal, sweetened to be more attractive to Greece, would be presented at Wednesday's meeting, lowering the interest rate and raising the proportion of debt targeted for rollover in the French plan.

The interest rate would come down to as little as 5.76 percent rather than the range of 5.5-8.0 percent originally suggested, the FT.com report said.

Politicians and bankers had expressed confidence last week that the French proposal would not trigger a default, but rating agency Standard & Poor's on Monday said it would involve losses to debt holders, most likely earning Greece a "selective default" rating.

The S&P statement was taken by EU policymakers as "a message to rework the plan not to ditch it," an EU source said.

"The French plan will not be abandoned for obvious political reasons, because member states want to have something to give to their national parliaments," the source said.

The IIF said on Friday that banks supported proposals to aid Greece and were considering a small number of options. Creditors are now trying to hammer out details.

A meeting involving some banks was held in Paris on Tuesday in an informal discussion to resolve issues, people familiar with the matter said.

There is also concern that the private sector may fall short of the target of raising 30 billion euros ($42.6 billion) from the plan if Germany's proposed 2 billion euro private-sector contribution is a gauge.

That made it essential to involve pension funds, hedge funds and insurers as well as banks, the French source said.

There are 82.6 billion euros of Greek government bonds maturing before the end of 2014, according to Reuters data.

The European Central Bank and other euro area central banks hold an estimated 25 billion euros of that debt, leaving about 58 billion in private hands. But not all creditors will participate.

France's new Finance Minister Francois Baroin said he would go to Berlin on Thursday to discuss the second Greek rescue package with his German counterpart Wolfgang Schaeuble.

"The target date is at the end of the summer (for an agreement), during the month of September," Baroin said.

Getting clarity on the accounting treatment of France's plan remains a key issue to getting momentum, sources said.

Moving too far from market prices could lead to an impairment on a wide portfolio, but too small a move would make it too costly for Greece.

The IIF, which represents insurers and other financial firms as well as banks including BNP Paribas, Deutsche Bank, HSBC and Societe Generale, is playing an informal role co-ordinating international banks to reach consensus about private-sector involvement in a bailout of debt-ridden Greece.

Wednesday's meeting will be chaired by Charles Dallara, IIF managing director. It is one of a series of meetings the IIF is co-ordinating, running in tandem with technical discussions held since an IIF meeting in Rome a week ago.

(Reporting by Alex Chambers, IFR Markets, in London; Paul Taylor in Paris; Additional reporting by Steve Slater in London, Julien Toyer in Brussels, Philipp Halstrick in Frankfurt and Jean-Baptiste Vey in Paris; Editing by Hans-Juergen Peters and David Hulmes)

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Banks cutting principal on some mortgages: report (Reuters)

NEW YORK (Reuters) – Bank of America Corp and JPMorgan Chase & Co have started modifying tens of thousands of mortgages where the banks deem the loans especially risky, even if the borrowers have not asked, the New York Times reported on Sunday.

In some cases, the paper said, the banks are slashing the amount borrowers owe, citing one case in Florida where a woman's principal balance was cut in half.

The paper said the banks are targeting holders of pay option adjustable-rate mortgages, a type of loan where borrowers have the option of skipping some principal and interest payments and having the amount added back onto the loan.

Such "option ARM" loans were seen as especially high risk in the wake of the financial crisis; the two banks collectively still have tens of billions of dollars of such loans in their portfolios.

One law professor quoted by the Times said the banks were behaving in contradictory ways, modifying some loans that should not be and not modifying some loans that should be.

Spokespeople for the two banks were not immediately available to comment.

(Reporting by Ben Berkowitz. Editing by Maureen Bavdek)

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Banks study Greek debt rollover ahead of key vote (Reuters)

By George Georgiopoulos and Emmanuel Jarry George Georgiopoulos And Emmanuel Jarry – 1?hr?32?mins?ago

ATHENS/PARIS (Reuters) – France offered a radical solution on Monday for banks to roll over holdings of Greek debt for 30 years as the Athens government fought to get backbench rebels to back a crucial austerity plan to avert bankruptcy.

With depositors fleeing Greek banks in growing numbers and financial markets watching anxiously, President Nicolas Sarkozy told a news conference in Paris that French banks had reached a draft agreement with the authorities on a voluntary rollover of maturing bonds.

"We concluded that by stretching out the loans over 30 years, putting (interest rates) at the level of European loans, plus a premium indexed to future Greek growth, that would be a system that each country could find attractive," he said.

The plan, drafted by French bankers, was put to a meeting of international bankers and European Union officials with the International Institute of Finance (IIF) in Rome on Monday but no decision was taken, an Italian Treasury official said.

In a sign of ebbing confidence that Greece can avoid default on its 340 billion euro debt mountain, Moody's said Greek banks had lost about 8 percent of private sector deposits so far this year as customers burned their savings due to unemployment, transferred funds abroad or bought gold.

French government sources said under an outline deal, banks would reinvest 70 percent of the proceeds when Greek bonds fall due in 2011-14 and cash out the rest. Of the amount reinvested, 50 percent would go into the new 30-year bonds and 20 percent would go into zero-coupon AAA bonds with deferred interest.

The new bonds would be placed in a Special Purpose Vehicle, effectively removing Greek debt from the balance sheets of participating banks, the source said.

Private banking sources said the new bonds could be guaranteed by the euro zone's rescue fund (EFSF) or the European Investment Bank. Banks would hold equity in the SPV instead.

However, a French government source described the solution, proposed by French bankers, as "a sort of private Brady bond without a public guarantee," referring to a 1989 swap of Latin American debt for tradeable securities, some of them guaranteed, proposed by then U.S. Treasury Secretary Nicholas Brady.

German banks voiced interest in the "French model" although Deutsche Bank chief Josef Ackermann said it was only one of several solutions being considered and it was unclear whether any satisfactory proposal could be found.

"Political leaders expect a solution by the end of the week but we should not rush it," Ackermann told Reuters Television in an interview. "It is important to have a good solution. The issues are complex and need to be discussed."

Any new financial rescue for Athens, including official lending and private sector participation, depends on the Greek parliament approving this week a five-year austerity plan and legislation to implement structural reforms and privatizations.

REBELS PRESSED

Greek Finance Minister Evangelos Venizelos met ruling socialist party (PASOK) rebels in Athens to push them to toe the line in parliamentary votes on Wednesday and Thursday, where a defeat could plunge the country into default.

Greece's conservative opposition has rejected calls for national unity, forcing Prime Minister George Papandreou to rely on his slim parliamentary majority to push through a painful mix of spending cuts, tax hikes and state selloffs.

However with Greece stuck in deep recession, at least three PASOK deputies have expressed serious reservations or outright opposition to a plan they say will crush any hope of growth for years to come and it is unclear how the numbers will play out.

Without parliamentary approval for the measures, which have caused a wave of strikes and demonstrations, the European Union and International Monetary Fund say they will not release the fifth tranche of the 110 billion-euro bailout agreed last year.

If the 12 billion-euro tranche is not forthcoming, the Greek government, which has been shut out of financial markets because of the ruined state of its public finances, will run out of money within weeks, probably triggering a Europe-wide crisis.

"If it is Greece alone, that's already big," Ackermann said. "But if other countries are drawn in through contagion, it could be bigger than Lehman," he said, referring to the disastrous 2008 collapse of Wall Street investment bank Lehman Bros.

Three euro zone sources in Brussels said EU officials were working on a contingency plan for Greece if its parliament rejects an austerity program and the country cannot receive the next installment of EU/IMF emergency loans.

The fallback plan, distinct from the French rollover ideas, involves ways to ensure Greece gets the liquidity needed to avoid default if the next 12 billion euro tranche of aid cannot be paid out by mid-July, the sources said.

PREPARATIONS

The debate in Athens is set to begin on Monday evening with an initial vote on the framework austerity package due on Wednesday, and lawmakers then voting on Thursday on a separate bill containing specific steps to implement it.

Defections over the past 13 months have cut Papandreou's support in the 300-member parliament to 155 seats, meaning a handful of votes could decide the issue, which may be further complicated if one bill passes and the other does not.

In an interview with Spanish daily El Mundo on Sunday, Deputy Prime Minister Theodore Pangalos said he believed the first vote would pass but he was less confident about the second implementation bill.

"That's where we may have problems," he said. "I don't know whether some of our legislators will vote against it."

Venizelos was due to meet wavering deputies throughout Monday in a last-ditch bid to ensure the votes pass after German ministers warned that Europe had to make plans for the event of a defeat which would block the next tranche of aid.

"(Rejection) isn't Plan A, or the most likely outcome but the euro zone and its financial sectors need to make preparations," Deputy Finance Minister Joerg Asmussen told a conference on Monday.

Progress in the rollover talks cooled demand for safe-haven bonds on Monday but the premium investors demand to hold Greek debt rather than benchmark German Bunds widened by a further 20 basis points to 1,432 basis points.

BAILOUT INSUFFICIENT

With the current 110 billion bailout insufficient to keep Greece going, European leaders are working on a further package of a similar size including a contribution from private banks which would agree to a voluntary rollover of their Greek debt.

Whether such a deal will be enough to stave off problems in the longer term remains uncertain. Many investors and economists believe that even if the austerity package is passed this week, it will merely delay an inevitable restructuring or default.

With the fate of both the existing aid plan and the new package dependent on this week's vote, major rallies are planned by the protesters who have been occupying Syntagma Square outside the Greek parliament in Athens for the past month.

Public anger at the political class has been fueled by Greece's worst recession since the 1970s, a youth unemployment rate of more than 40 percent and public finances that have been shattered by a debt equivalent to some 150 percent of gross domestic product.

The powerful public sector union ADEDY and its private sector equivalent GSEE are due to hold a 48-hour strike on June 28 and 29, that will hit public transport, telecoms, the post office and many hospitals.

Many companies, including the main electricity group PPC which is slated for partial privatization next year, have already started rolling stoppages.

On Monday, protesters hung a huge banner off the Acropolis, the ancient rock outcrop which dominates Athens, proclaiming: "People have the power, they never surrender."

(Additional reporting by Stephen Slater in London, Luke Baker and Julien Toyer in Brussels, Nick Vinocur in Paris, Stefano Bernabei and Gavin Jones in Rome; Writing by James Mackenzie and Paul Taylor, editing by Paul Taylor/Janet McBride)

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Banks move closer to deal on Greek bailout (Reuters)

ATHENS/FRANKFURT (Reuters) – Banks and policymakers moved closer to a deal on Friday to help Athens secure funds ahead of a parliamentary vote on austerity next week that Greek Prime Minister George Papandreou must win to avert default.

Despite a refusal by the conservative opposition to back the plan agreed with international lenders and signs of revolt in his own socialist party, Papandreou said he was confident the deeply unpopular package of spending cuts, tax hikes and privatizations would pass.

"It is a moment of historic importance. If everybody resists, worse things will come, perhaps even bankruptcy," Papandreou told a news conference at the sidelines of a summit of European Union leaders in Brussels.

The meeting saw euro zone governments discuss a new bailout package for Greece, which could include up to 30 billion euros from the private sector to help cut Greece's huge public debt.

President Nicolas Sarkozy said French banks had agreed to participate in a voluntary rollover of Greek debt, Spain's Jose Luis Rodriguez Zapatero said Spanish banks were willing to take part in a scheme to buy Athens more time while Berlin has asked German banks to state their intentions next week.

"We have had many meetings with the banks and insurance companies. There is no difficulty," French President Nicolas Sarkozy told reporters after the meeting.

However, no new money will flow unless the Greek government enacts deep cuts and markets remain skeptical. The euro fell sharply on doubts the government will win the day after a maverick ruling party member said he would vote against.

"It's very ugly; a complete mess," said a trader in London. "There's a rumor the austerity won't pass."

After a difficult series of meetings this week, new Greek Finance Minister Evangelos Venizelos thrashed out an agreement with inspectors from the EU and the International Monetary Fund on Thursday to release the funds Greece needs immediately.

But if the vote next week is lost, international lenders are unlikely to release a 12 billion euros funding tranche, meaning the government will run out of cash within days.

Greece accepted a package of 110 billion euros of EU/IMF loans in May 2010 but now needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.

International lenders want binding commitments that Athens will push through the painful measures judged necessary to get its shattered public finances back in order.

The government won a vote of confidence this week with 155 out of 300 votes in parliament, showing how tight the June 29 vote on its austerity package could be.

In a sign of the uncertainty around the vote, which will be accompanied by a two-day general strike, one deputy from the ruling PASOK party said he will oppose the mix of higher taxes, spending cuts and state selloffs.

"Shops are shutting down every day and we are taking anti-growth measures," party maverick Thomas Robopoulos, a car dealer from Greece's second city, Thessaloniki, and one of the few businessmen in parliament told Reuters. "I will take the floor in parliament and try to convince them to do something."

Daily protests continue in Athens and other cities and an opinion poll on Friday put Greece's conservative opposition 2.1 points ahead of PASOK and showed three quarters of Greeks oppose the raft of tax hikes and spending cuts that will hit them hard.

Greece's partners have expressed growing impatience with what they see as a refusal to face the seriousness of the situation. The attitude of the conservative opposition, which has said it will oppose parts of the package, has particularly enraged European leaders.

"I made it very clear that for the acceptance and for the stability of Greece, it would be highly desirable for the opposition to vote for this package," German Chancellor Angela Merkel said in Brussels.

GETTING BANKS ON BOARD

As well as reform commitments by Greece, private sector involvement in a new rescue is seen by many governments as a vital element to meet objections that European taxpayers were left to foot the bill for saving bank balance sheets.

But it has been complicated by the fact that any scheme must be voluntary, otherwise it risks being classified by credit ratings agencies as a default, or at least a "credit event," which could have serious repercussions for financial markets.

Banking sources told Reuters that European banks and finance officials were discussing a proposal to replace existing Greek debt with a different type of bond to get around ratings agencies' reservations.

The proposal is for a voluntary rollover of debt into securities of a different and not comparable credit composition to avoid agencies moving Greece to default status.

"I don't want to comment on the current state of these talks, I think it's most important for us to have these talks first and then report to you the results," Merkel said. "I don't think it would be wise to give you any numbers. We don't have any hard numbers as of yet.

At the EU summit in Brussels, Papandreou promised to push through radical economic reform after Venizelos clinched agreement with EU and IMF inspectors on extra tax rises and spending cuts to plug a 3.8 billion euro funding gap within an agreed five-year austerity plan worth 28.4 billion euros.

On Thursday, Venizelos announced additional measures including extra spending cuts, lowering the minimum income tax threshold and imposing a special "solidarity levy," measures that will hit ordinary Greeks yet harder.

Employees at Greece's dominant electricity producer PPC, which is slated for privatization next year, were on rolling 48-hour strikes for a fifth day on Friday. The union opposes plans to sell a 17 percent stake in the firm and said the labor action will lead to power cuts.

"Many thought the change of guard at the finance ministry would have helped the weak income groups and those who consistently pay their taxes," said Ethnos, a center-left daily that is normally supportive of the government. "Unfortunately, these hopes were dashed."

(Additional reporting by Emmanuel Jarry, Julien Toyer, Fiona Ortiz, Alex Chambers and Philipp Halstrick, writing by James Mackenziez)

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