By Marius Zaharia
LONDON (Reuters) - European stock markets rebounded on Thursday as jittery investors pinned their hopes for a deal to avert a Greek default on a proposal from its creditors, as negotiations with Athens have so far produced no agreement.
The market's assumption this week has been that a deal would eventually be reached after European officials said on Monday and Tuesday a proposal from Greece was a good basis for talks.
No progress has been achieved after that proposal and negotiations stumbled on Wednesday, with euro zone finance ministers accusing Greece of refusing to compromise ahead of a deadline next week when an International Monetary Fund loan tranche of 1.6 billion euros comes due.
The creditors will now put forward their own proposal for a cash-for-reforms deal - on the basis of an offer agreed on in Berlin at the beginning of June between Germany, France, the European Central Bank, the International Monetary Fund and the European Commission.
The revised proposal, seen by Reuters, extends the deadline by which Greece would have to completely phase out a pension supplement, called EKAS, by two years to 2019, compared with the previous position of the creditors. The creditors also agreed that a value added tax reform that scraps lower VAT exemptions for islands and raises VAT on restaurants and hotels could be reviewed at the end of next year.
"The market is 100 percent being driven by headlines on Greece. The latest move seem to be pointing towards a higher chance of an agreement towards the weekend. There's an urgent need for a deal as Greece is approaching a kind of hard deadline," said DZ Bank strategist Felix Herrmann.
The pan-European FTSEurofirst 300 index was up 0.2 percent at 1579.43 points, having been down half a percent earlier. Yields on top-rated German 10-year Bunds, which set the standard for euro zone borrowing costs, rose 4 basis points to 0.88 percent, having traded as low as 0.82 percent earlier.
The differences between Greece's proposal and that of its creditors are not big enough to justify failing to reach an agreement, a senior Greek government official said.
Greek officials say without a deal the country does not have the money to pay the IMF on Tuesday. A default may trigger a bank run and may push the country out of the euro.
"Today is another day that will be all about Greece," said Anders Svendsen, chief analyst at Nordea.
Yields on Europe's lower-rated bonds in Spain, Italy and Portugal were steady. The three countries are seen as the most vulnerable to contagion from Greece.
EURO HOLDING UP
The dollar index, which tracks the greenback against a basket of six major rivals, was flat at 95.285.
The euro was down slightly at $1.1196, showing less responsiveness to the Greek crisis than the bond and stock markets. Some strategists say the market has been using the euro as a funding currency for carry trades, in which investors borrow euros and sell them to buy higher-yielding currencies.
"What has been fairly clear is that every time there's a chance of a deal the euro plummets, and every time there's disappointment coming along, it reverses course," said Neil Mellor, FX strategist at Bank of New York Mellon (NYSE:BK) in London. "The only interpretation you can place on that is that the market is looking to use the euro as a funding currency in a carry trade ... The prerequisite of a carry trade is relative stability, so if a Greek deal is on, you sell the euro."
The Swiss franc sank to a 10-day low against the euro after the head of the Swiss National Bank warned it was considerably overvalued and that the bank would continue to intervene in currency markets.
In commodities trading, crude oil prices steadied just above $60 a barrel, while spot gold edged higher.