Leftist Prime Minister Alexis Tsipras was told on Sunday to push legislation through parliament to convince his 18 partners in the euro zone to release immediate funds to avert a state bankruptcy and start negotiations on a third bailout programme estimated at up to €86 billion (NZ$142 billion).
Six sweeping measures including tax and pension reforms must be enacted by Wednesday night and the entire package endorsed by parliament before talks can start, a draft decision by Eurogroup finance ministers sent to the leaders showed.
The document included a German proposal to make Greece take a "time-out" from the euro zone if it fails to meet the conditions. But a senior EU source said the idea was illegal and would be dropped from the summit statement if Tsipras accepted other deeply unpalatable terms.
Tsipras said on arrival in Brussels that he wanted "another honest compromise" to keep Europe united.
But German Chancellor Angela Merkel, whose country is the biggest contributor to euro zone bailouts, said the conditions were not yet right to start negotiations, sounding cautious in deference to mounting opposition at home to more aid for Greece.
"The most important currency has been lost and that is trust," she told reporters. "That means that we will have tough discussions and there will be no agreement at any price."
If Greece meets the conditions, the German parliament would meet on Thursday to mandate Merkel and Finance Minister Wolfgang Schaeuble to open the talks on a new loan. Then Eurogroup finance ministers could meet again on Friday or at the weekend to formally launch the negotiations.
As the marathon summit dragged into early Monday morning, with breaks for private meetings between Tsipras and the French, German and EU leaders, markets in Asia-Pacific marked the euro down and bought safe-haven bonds. The absence of deal in Brussels also hit pre-market trading in the United States.
EU officials said the biggest of several sticking points was Germany's insistence that Greek state assets worth €50 billion be placed in a trust fund in Luxembourg to be sold off with proceeds going directly to pay down debt. The EU says experts evaluate Greek assets earmarked for privatisation at just €7 billion.
One diplomat said that was tantamount to turning Greece into a "German protectorate", stripping it of more sovereignty. Another diplomat said Merkel had declared the matter a "red line" for Germany and insisted that the International Monetary Fund be fully involved in any third bailout for Greece, despite resistance from Athens.
Tsipras, for his part, was insisting on a stronger commitment by the creditors to restructure Greek debt to make it sustainable in the medium-term.
An EU official said several options were being discussed to give Greece bridging funds once it passed the laws, including releasing European Central Bank profits on Greek bonds, tapping an emergency fund run by the European Commission, or bilateral loans from friendly countries such as France. Two official French sources denied that any bridging loan was planned.
Finance ministers said Greece needed €7 billion of funding by July 20, when it must make a crucial bond redemption to the European Central Bank, and a total of €12 billion by mid-August when another ECB payment falls due.
Greece has already had two bailouts worth €240 billion from euro zone countries and the International Monetary Fund, but its economy has shrunk by a quarter since the crisis began, unemployment has soared above 25% and one in two young people is out of work.
Athens defaulted on an IMF loan repayment last month and faces state bankruptcy if it cannot make the bond redemption on July 20, which is likely to force the ECB to cut emergency funding for Greek banks.
PM to expel party rebels
Greek Prime Minister Alexis Tsipras is set to begin a bruising week by clearing out party rebels opposed to an austerity package that will have to go through parliament within days, people close to the government say.
To convince creditors to start talks on the third bailout package, Greece will have to pass laws by mid-week to cut spending, toughen value added tax, overhaul pension systems, change bankruptcy rules and advance privatisations.
However a mini-rebellion of lawmakers last week laid bare tensions in the ruling Syriza party. The revolt saw 17 deputies from the government benches withhold support in a vote to authorise bailout negotiations, leaving Tsipras reliant on opposition parties to pass the measure.
Dealing with the consequences of that revolt will provide a clear signal of how determined Tsipras will be in pushing through the reforms European partners are demanding.
Whether cooperation with opposition parties leads to a full-scale national unity government, with seats in the cabinet is still unclear, but the change has left the future of the radical leftwing government in doubt. The government has 162 seats in the 300 seat parliament.
Under a Syriza party agreement, deputies are supposed to resign their seats if they publicly disagree with government policy although there is nothing to stop them refusing to stand down and holding on to their seats as independents.
