BERLIN (Reuters) – Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday.

"There are internal discussions within the Euro group and proposals, one of which comes from Germany, on how to constructively treat country aid programs that are continuously off track, whether this can simply be ignored or whether we say that's enough," the source said.

The source added that under the proposals European institutions already operating in Greece should be given "certain decision-making powers" over fiscal policy.

"This could be carried out even more stringently through external expertise," the source said.

The Financial Times said it had obtained a copy of the proposal showing Germany wants a new euro zone "budget commissioner" to have the power to veto budget decisions taken by the Greek government if they are not in line with targets set by international lenders.

"Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time," the document said.

Under the German plan, Athens would only be allowed to carry out normal state spending after servicing its debt, the FT said.

"If a future (bail-out) tranche is not disbursed, Greece cannot threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement," the FT quoted the document as saying.

The German demands for greater control over Greek budget policy come amid intense talks to finalize a second 130 billion-euro rescue package for Greece, which has repeatedly failed to meet the fiscal targets set out for it by its international lenders.

CHAOTIC DEFAULT THREAT

Greece needs to strike a deal with creditors in the next couple of days to unlock its next aid package in order to avoid a chaotic default.

"No country has put forward such a proposal at the Eurogroup," a Greek finance ministry official said on condition of anonymity, adding that the government would not formally comment on reports based on unnamed sources.

The German demands are likely to prompt a strong reaction in Athens ahead of elections expected to take place in April.

"One of the ideas being discussed is to set up a clearly defined priorities on reducing deficits through legally binding guidelines," the European source said.

He added that in Greece the problem is that a lot of the budget-making process is done in a decentralized manner.

"Clearly defined, legally binding guidelines on that could lead to more coherence and make it easier to take decisions - and that would contribute to give a whole new dynamic to efforts to implement the program," the source said.

"It is clear that talks on how to help Greece get back on the right track are continuing," the source said. "We're all striving to achieve a lasting stabilization of Greece," he said. "That's the focus of what all of us in Europe are working on right now."

(Reporting By Noah Barking; Additional reporting by George Georgiopoulos in Athens and; Adrian Croft in London; writing by Erik Kirschbaum; editing by Andrew Roche)

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ATHENS (Reuters) – Greece and its private creditors head back to the negotiating table on Saturday to put together the final pieces of a long-awaited debt swap agreement needed to avert an unruly default.

After weeks of muddling through round after round of inconclusive talks, the negotiations appear to be in their final phase, with both sides hoping to secure a preliminary deal before Monday's European Union summit.

Prime Minister Lucas Papademos was expected to meet bankers' chief negotiator Charles Dallara at around 1330 GMT (8:30 a.m. EST) on Saturday, before meeting inspectors from the "troika" of foreign lenders pressing Athens to step up painful reforms.

"Today will be another tough day," said George Karatzaferis, leader of the far-right LAOS party, one of three parties in Papademos's emergency coalition government. "We will see whether we can bear the burden that lies ahead."

The debt swap, in which private creditors are to take a 50 percent cut in the nominal value of their Greek bond holdings in exchange for cash and new bonds, is a prerequisite for the country to secure a 130-billion-euro rescue package.

Papademos told Reuters in an interview on Friday he expected the debt talks to be concluded within days.

"We made significant progress over the last few weeks and in the last few days in particular. We are trying to conclude the discussions as quickly as possible. I am quite optimistic an agreement will be reached in the coming days," he said.

But concern has grown that the deal may not do enough to get the country's debt reduction plan back on track, and that Greece's European partners will be forced to stump up funds to cover the shortfall.

The German news magazine Der Spiegel reported on Saturday that Greece's international lenders thought Athens would need 145 billion euros of public money from the euro zone for its second bailout rather than the planned 130 billion euros.

The magazine said the extra money was needed because of the deteriorating economic situation in Greece, echoing a Reuters report on Thursday.

Athens also faces problematic talks with the "troika" of foreign lenders - the European Commission, IMF and European Central Bank - who have warned it needs to do more to drive through painful reforms before they dole out any more money.

"It's all very dense, difficult and crucial," a Greek finance ministry official said. "There is optimism because the country needs to survive and we need to protect its citizens because they have suffered a lot."

Athens and its creditors have broadly agreed that new bonds under the swap would probably have a 30-year maturity and a progressive interest rate. The deal is aimed at chopping 100 billion euros off Greece's crushing 350-billion-euro debt load.

But they have wrangled for weeks over the interest rate Greece must pay on the new bonds and pressure has grown in recent days on the European Central Bank and other public creditors to accept a cut in the value of their Greek bond holdings like the private sector creditors.

A debt deal must be sealed in about three weeks as Greece has to repay 14.5 billion euros of debt on March 20. Otherwise Greece will sink into an uncontrolled default that might spread turmoil across the euro zone.

Papademos promised on Friday this would not happen. "Greece will not default," he said.

International Monetary Fund Managing Director Christine Lagarde said on Saturday that euro zone members were making progress to overcome their crisis but must do more to strengthen their financial firewall, adding that the IMF was ready to help.

"There is progress as we see it," Lagarde told a panel discussion at the World Economic Forum in Davos.

"But it is critical that the euro zone members actually develop a clear, simple, firewall that can operate both to limit the contagion and to provide this sort of act of trust in the euro zone so that the financing needs of that zone can actually be met."

Senior euro zone officials have expressed optimism on the Greek debt deal, though previous predictions of an imminent agreement have failed to become reality.

Greece is in its fifth year of recession, and hopes of an end to the crisis in the near term have virtually gone, because of the combination of squabbling politicians, rising social anger and its inability to get its debt load under control.

Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday.

Greece said such a move was out of the question, adding that a similar proposal had been made in the past by a Dutch minister without getting anywhere.

"There is no way we would accept such a thing," a Greek government official told Reuters.

(Additional reporting by Renee Maltezou, Writing by Deepa Babington; editing by Tim Pearce)

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ADDIS ABABA (Reuters) – Sudan will free ships carrying cargos of crude it seized from South Sudan to ease tensions between the former civil war foes and help the two states agree on a deal over oil revenue, Sayed El-Khatib, deputy head of negotiating team said on Saturday.

"President Bashir is ready to make this gesture. Sudan is going to release the vessels detained in Port Sudan," he told a media conference in the Ethiopian capital.

South Sudan became independent in July under a 2005 peace agreement with Khartoum that ended decades of conflict but both sides have failed to agree how to untangle their oil industries.

The new landlocked nation needs to use a northern pipeline and the port of Port Sudan to export its crude but has failed to reach an agreement with Khartoum over a transit fee, prompting Sudan to start seizing oil as compensation.

South Sudan said on Monday it had started shutting down oil production and accused Sudan of seizing $815 million worth of crude.

South Sudan's top negotiator said on Friday his country would complete the shutdown by Saturday, after Sudanese President Omar al-Bashir and South Sudan's President Salva Kiir met on the sidelines of a meeting of East African officials in Ethiopia.

Sudan said it was freeing the ships to help end the deadlock.

"By doing this step, we expect the cover agreement to be signed, the shutdown to be halted, and the terms of the cover agreement to be respected," said El-Khatib.

"Before the end of today, we could be able to sign the cover agreement. We, at least, are ready to sign."

Officials said in November South Sudan was producing about 350,000 barrels of oil per day.

China is the biggest buyer of oil from the two countries, some 12.99 million barrels last year. That amounted to five percent of last year's crude imports by China, which is also the top investor in South Sudan's oilfields.

(Writing by James Macharia; Editing by Toby Chopra)

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