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Greece to send loan request to euro zone as cash reserves burn

(Adds ECB funding, Schaeuble quotes)

* Greece to submit request for “loan agreement” on Thursday

* Athens minister hopes for deal by weekend

* Germany sees limited room for manoeuvre in talks

* Greece may run out of money by end of March -source

* ECB modestly raises emergency funding for Greek banks

By Renee Maltezou and John O’Donnell

ATHENS/FRANKFURT, Feb 18 (Reuters) – Greece’s leftist-led government said it will ask the euro zone on Thursday to extend a “loan agreement” for up to six months, raising prospects of a last-minute deal to keep the heavily indebted country afloat.

While European officials worked frantically with Athens to find a formula, the European Central Bank agreed on Wednesday to raise emergency funding for Greek banks, a person familiar with the ECB talks said. But the amount was enough to cover their needs for only a week if nervous Greeks keep pulling their deposits out at the current rate.

Greek Finance Minister Yanis Varoufakis expressed optimism that an impasse with fellow euro zone governments could be broken by the end of the week, saying he hoped a proposal to be submitted by Athens on Thursday would gain acceptance including from Jeroen Dijsselbloem, who heads the Eurogroup of the bloc’s finance ministers.

Dijsselbloem, along with German Finance Minister Wolfgang Schaeuble, has led demands for Athens to stand by its commitments to harsh austerity under its bailout programme with the European Union and IMF — the very policies that the new left-wing-led government has vowed to end.

With the bailout due to expire at the end of this month, Schaeuble has poured scorn on suggestions that Athens could negotiate an extension of euro zone funding without making any promises to push on with budget cuts and economic reforms.

But on Wednesday he indicated that there may be at least some room for compromise on a dispute that, if unresolved, could lead to Greece’s bankruptcy and departure from the euro zone.

“Our room for manoeuvre is limited,” he said during a debate in Berlin, but added. “We must keep in mind that we have a huge responsibility to keep Europe stable.”

Greece’s finances are in peril. It is burning through its cash reserves and could run out of money by the end of March without fresh funds, a person familiar with the figures said. The source said Athens had enough to repay a 1.5 billion euro ($ 1.7 billion) instalment to the International Monetary Fund next month but would struggle to pay public sector salaries and pensions in April.

TIDING BANKS OVER FOR A WEEK

Likewise its banks are dependent on the Emergency Liquidity Assistance scheme which is controlled by the ECB and provides funding as Greeks pull out their deposits, fearing Athens will impose capital controls to limit withdrawals — or that the country might even crash out of the common currency.

The ECB agreed on Wednesday to raise a cap on funding available under the scheme to 68.3 billion euros, a person familiar with the ECB talks said.

That was a rise of just 3.3 billion euros, less than Greece had requested. “The increase in the cap was a bit below what was requested, about 5 billion more, and expected,” one senior banker said. “Assuming the present outflow trends persist, it is enough to carry us over for another week.”

This modest increase keeps Greece’s banks, and thereby the government, on a tight leash and raises the pressure for a compromise at the Eurogroup.

The government of Prime Minister Alexis Tsipras wants to keep a financial lifeline for an interim period while sidestepping the bailout’s tough austerity conditions.

Whether other finance ministers in the 19-nation currency bloc, who rejected such ideas at a meeting on Monday, accept the request as a basis to resume negotiations will depend on how it is formulated, an EU source said. The wording has to match EU legal texts to win approval in several euro zone parliaments.

German Economy Minister Sigmar Gabriel, leader of the Social Democratic junior partners in conservative Chancellor Angela Merkel’s coalition, welcomed what he called the signal from the Greek government that it was ready to negotiate.

Tsipras said talks were at a crucial stage and his demands for an end to austerity were winning backing. “We have managed for the first time through contacts with foreign leaders to create a positive stance on our requests,” he said at a meeting with President Karolos Papoulias.

BRINKMANSHIP

EU officials said intensive consultations were under way between Athens, the Eurogroup and the European Commission, with Italy and France also involved in the search for a compromise.

European stocks rose to multi-year highs on Wednesday amid rising optimism that a deal would be reached by the end of the week. Greek government bond yields fell sharply and Spanish, Portuguese and Italian yields also dropped as fears of contagion to other vulnerable euro zone economies eased.

In a sign of concern in Washington at the financial risks to a strategically located NATO ally, U.S. Treasury Secretary Jack Lew telephoned Varoufakis to urge Greece to strike a deal with the euro zone and IMF, warning that failure would lead to immediate hardship.

Lew said the United States will continue to prod all parties in the talks to make concrete progress, noting that uncertainty was “not good for Europe.”

The Athens government released documents on Wednesday indicating it was taking a more flexible line to placate euro zone creditors than its anti-bailout rhetoric at home has suggested. They showed Varoufakis had offered to accept conditions on an extension to its loan agreements and even an inspection by the European Commission at a fraught meeting in Brussels on Monday.

($ 1 = 0.8775 euros) (Additional reporting by Reuters bureaux; Writing by David Stamp; Editing by Ruth Pitchford)

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