The Greek government is split over how to break a deadlock with creditors that has revived bond-market jitters and talk of “Grexit.”

Some aides to Prime Minister Alexis Tsipras are pressing for immediate fiscal concessions, while others are pushing for a tough stance toward the government’s creditors and the International Monetary Fund, according to Greek officials.

The debate within the government, which is led by the Syriza party, comes as the IMF haggles behind the scenes with the German-led eurozone over the duration of Greek austerity and the cost of debt relief.

Amid the wrangling, doubts are mounting in financial markets about whether Greece can fulfill the tough terms of its latest, EUR86 billion ($91.9 billion) bailout plan, signed in 2015. The bailout was Greece’s third since 2010 and is encountering the same problems as the others: Repeated fiscal retrenchment is straining Greek politics without restoring confidence that the country can grow and recover.

With Germany’s support, the IMF is now pressing Athens to broaden its income-tax base and cut pension spending to hit its agreed target of a “primary” budget surplus, excluding debt service, of 3.5% of gross domestic product next year.

The government has balked so far at the IMF’s demand that it legislate the measures immediately rather than wait to determine if the steps are needed.

But key economic advisers to Mr. Tsipras fear that a lengthy confrontation with creditors could undermine confidence in Greece’s hoped-for recovery, several government officials said. These advisers, including Finance Minister Euclid Tsakalotos, believe Greece has only a few weeks left to cut a deal before Europe’s attention shifts to its packed domestic political calendar, which includes elections in the Netherlands, France and Germany, the officials said.

Other political aides fear the fallout from unpopular austerity measures and want to resist the IMF’s demands, in hope of a compromise supported by European Union institutions in Brussels, which are more sympathetic with Mr. Tsipras’s political difficulties at home. Greece doesn’t need money from its international creditors until large debts fall due in July.

The two camps in the governing Syriza party have had heated arguments in the past week, said people familiar with the debate. The tensions spilled into Greece’s parliament last week when, in an unusual outburst between fellow party members, Mr. Tsakalotos erupted in anger at the speaker of parliament.

Mr. Tsakalotos fears that some colleagues are seeking to pin the blame on him for upcoming concessions to the IMF, party insiders said.

Meanwhile, IMF and EU officials reiterated their clashing official positions on Greece at Monday’s IMF board meeting in Washington. The real negotiations among the creditors, however, are happening elsewhere.

Mr. Schäuble held talks in Berlin last week with the head of the IMF’s European department, Poul Thomsen, at which Greece’s two most powerful creditors discussed the next steps, according to people familiar with the matter.

Eager for the IMF to rejoin the Greek bailout after a two-year hiatus, Germany supports the fund’s demands for stringent Greek overhauls. But Berlin and the fund differ over how to split the burden.

The German finance ministry wants Athens to run large primary surpluses of 3.5% of GDP for 10 years, which would reduce the amount of debt relief that Greece needs. The IMF has argued that such a long period of austere fiscal policies is neither politically realistic nor economically ideal, given Greece’s depressed economy and fragile politics. Greek officials have so far indicated they are willing to accept the 3.5% target only for three years.

The IMF wants to see a combination of stronger Greek policy overhauls and clearer European debt commitments before the fund gives Greece a new loan program of its own.

Mr. Tsipras hasn’t reached a decision on how far to move toward satisfying the IMF’s fiscal demands. In recent weeks, he has also considered the option of calling snap elections if creditors don’t show him some flexibility, Athens officials said privately.

Elections, which are currently not the favored option, would likely lead to Syriza becoming an antiausterity opposition party while the conservative New Democracy party leads the next government and faces the creditors.

Above all, Mr. Tsipras want a clear promise of debt relief from Europe in return for inflicting fresh fiscal pain on weary Greek households. His problem: Mr. Schäuble is insisting on a two-step sequence, in which Greece first signs up to more austerity before Berlin sits down with the IMF to see how much debt relief is still necessary.

Some officials on the creditors’ side warn that Mr. Tsipras can expect only warm words from Europe about debt relief until he has delivered the fiscal measures. That could make the deal hard to swallow for Syriza, which has lost much of the voter support that swept it to victory twice in 2015.

The IMF’s view, contested by Athens and EU officials in Brussels, is that Greece’s current policies will achieve a primary surplus of only 1.5% next year. To find an extra EUR4 billion ($4.7 billion) or so to reach 3.5%, Greece needs to lower the threshold for paying personal income tax and to reduce pension levels, the IMF believes, and it wants those measures passed into law now.

In addition, the IMF argues Greece needs to make its labor laws more flexible and business-friendly, while Syriza wants to strengthen labor unions’ bargaining power–an ideological difference that could prove as hard to bridge as the fiscal gap.

Source: Dow Jones