Greece handed its creditors new proposals on unlocking funds to keep the country from default, with Prime Minister Alexis Tsipras offering hope for a deal and warning the cost of failure would be enormous.
The reform proposals mark a further attempt by Tsipras to compromise with lenders as time runs out to reach a deal to prevent his country going bankrupt.
Indicating a more conciliatory mood as he prepares to meet German Chancellor Angela Merkel and French President Francois Hollande on Wednesday, Tsipras agreed to increase the rate of Value Added Tax and proposed higher budget surplus targets to bridge the gap with lenders.
Greece's bailout programme with the European Union and IMF expires at the end of this month, and Athens must make big debt repayments by then that may be impossible without funds from its creditors.
In an Italian newspaper interview published on Tuesday, Tsipras adopted a more conciliatory tone than last Friday, when he dismissed as "absurd" his creditors' offer of cash in return for promises of further reforms and austerity.
Signalling room for compromise, he singled out Greece's budget surplus before its debt repayments, which Athens wants to keep as low as possible to free up funds to help a population that has suffered badly during five years of economic crisis. But he showed no sign of yielding to the creditors' demands that Athens cut pensions.
"I think we're very close to an agreement on the primary surplus for the next few years," he told Corriere della Sera. "There just needs to be a positive attitude on alternative proposals to cuts to pensions or the imposition of recessionary measures."
WAVES OF AUSTERITY
Since his Syriza party won elections earlier this year, Tsipras has repeatedly denounced the futility of imposing waves of austerity on a country whose economy has already shrunk by a quarter, radically reducing living standards and sending unemployment soaring.
But Greece has received nothing from its creditors since last August and they are unwilling to release the remaining bailout funds without Athens making the reforms that they believe are essential if it is to stand on its own two feet.
Tsipras warned against assuming that if Greece defaults it could be allowed to fall out of the euro zone without profound consequences. "It would be the beginning of the end of the euro zone," he said. "If Greece fails, the markets will immediately go to look for the next one. If negotiations fail, the cost for European taxpayers would be enormous."
He also ruled out the option of early elections to end the standoff with lenders, saying: "I don't expect or want elections... we won't betray the Greek people."
Taxpayers in Germany, the biggest contributor to Greece's 240 billion euro bailouts, are particularly hostile to helping Athens. The European Central Bank said on Monday that Greece could have only a minimal effect on the euro zone due to its small size and the fact that the bloc has erected financial "firewalls" to stop the spread of crises.
However, some economists agree with Tsipras's view that a Greek departure would only encourage speculation on financial markets about who was next to leave, meaning more countries might have to be bailed out.
In a sign of popular resistance to the creditors' demands, a regional governor said Greek islanders wanted to hold a referendum on whether to veto proposals to scrap a reduced rate of VAT for the islands. Athens argues the increase would hurt tourism, a major earner.
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