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ATHENS (Reuters) - Greece and its lenders resumed a long-stalled review of its bailout on Tuesday, with the government in Athens braced to commit to yet more austerity in exchange for the funds the country needs to remain solvent.
The review has dragged on for months, partly due to a rift between the European Union and the International Monetary Fund over Greece's fiscal goals and prospects next year - when the current rescue program expires - and beyond.
To help break the impasse, the Greek government last week agreed to pre-legislate economic reforms, including cuts in income tax breaks and pensions. Those would take effect from the start of 2019, the year parliamentary elections are due.
Those would only kick in if the government misses a target of generating a primary surplus of 3.5 percent from 2019, but on the condition that any impact would be offset elsewhere.
"We are trying to get a staff-level agreement by the next Eurogroup in March," Greek Finance Minister Euclid Tsakalotos told lawmakers.
The lenders are asking Greece to make extra savings worth 2 percent of gross domestic product, so it can meet a target of a 3.5 percent primary surplus - which excludes debt-service costs - that they have set for 2018 and the post-bailout period.
"The lenders' representatives will ask for measures of 1 percent from lowering the tax-free threshold and another 1 percent from pension cuts," an official with knowledge of the negotiations in Athens told Reuters on condition of anonymity.
The government estimates the 2016 primary surplus will exceed 2 percent of GDP, well above the lenders' 0.5 percent target, after the economy unexpectedly returned to growth last year.
"Without publicly saying it, Athens wants the total (additional) measures to be worth around 1.5 percent of GDP, after the better-than-expected surplus and better economic performance," a second source close to the talks said.
"The institutions could discuss a gradual implementation of the pension cuts," the second official said.
The IMF, still undecided on whether to participate in what would be Greece's third rescue package, says Athens cannot meet its targets unless it is granted further debt relief and adopts extra belt-tightening measures.
Debt relief is opposed by several of Greece's European lenders, notably Germany.
The uncertainty has fueled fears of a new financial crisis, with investors already nervous about how a populist revival in the euro zone will affect close-fought election races in The Netherlands, France and Germany between now and autumn.
Greece does not need more loans until the third quarter, but if bailout funds are not paid in time it will face an elevated risk of defaulting on debt repayments worth about 7.5 billion euros ($7.95 billion) in July.
Editing by Larry King