By Balazs Koranyi
WASHINGTON (Reuters) - The International Monetary Fund will not join the Greek bailout program but will likely accept a special advisory status with limited powers that keeps it at the table, two senior sources with direct knowledge of the proposals said.
The IMF has been holding out for more than a year over the terms under which it would participate in any new program, arguing that the financial targets set in the European bailout are unrealistic without major debt relief.
But the Fund is increasingly resigned to European resistance to debt relief for Greece and it is now in talks to accept a newly created role that would let it play a part with limited formality, the sources said.
"It will be more than an advisor but the role will not have the strict conditionality, like the compliance and economic health checks every three months," one of the sources said.
Talks between Greece, its European creditors and the IMF have been at an impasse since German finance minister Wolfgang Schaeuble insisted on the IMF taking part but rejected calls from IMF Managing Director Christine Lagarde for a big debt restructuring.
"This way Lagarde can go to the board and say, hey, 'I'm not violating our rules' and Schaeuble, whose government is facing an election next fall, can say, 'see, I have the IMF on board'" the source said.
The exact nature of the IMF's role has not been decided but it would have more powers than a simple advisor and would for example be responsible for drawing up certain proposed agreements and negotiating documents, coordinating with the Greek and European Union sides.
"They won't put money into the program but it won't be just technical assistance; they will probably take a special advisory role to be created especially for the Greek bailout," the second source said.
"Talks this week just made it clear that the IMF just can't come on board formally."
"They will remain part of the troika and be at all the talks," the source added.
Greek and IMF officials held talks at the Funds' fall meetings in Washington this week, discussing this special status, which was supported by the Greek side. Despite the change in the IMF's role, Greek officials believe it will aid them having a body that supports debt restructuring at the table.
The IMF was not immediately available for comment on the what the sources said.
Poul Thomsen, director of the IMF's European Department, said on Friday that the IMF is still "fully engaged" on Greece but is insisting on debt relief, although this need not come in the form of principal reduction.
"We have not changed our mind on this. This discussion we will have in the coming months," Thomsen said.
The Greek economy has suffered from a deep recession with demand weighed down by fiscal cutbacks, a heavy tax burden, capital controls and a lack of investment.
The sources added that while the IMF is officially expecting the economy to grow by 0.1 percent, the actual figure is still likely to be in negative territory. That is far short of the IMF's 2.8 percent target for next year in the Fund's latest economic projections.
The sources said that an agreement over Greek debt relief was still possible but the window of opportunity was very narrow and depended on the quick conclusion of the next bailout review.
If the review drags on, then talks would be put off until after German elections next fall as any discussion on restructuring debt will irk German voters, the sources said.
The Greek side argues that it does not need a haircut but could manage its debt if its repayments were smoothed out, maturities were extended and more expensive IMF debt was swapped for cheaper European funding.
Some of these measures are not acceptable for the EU, however, so talks have moved only slowly.
The Greek economy would also get a major boost from being included in the European Central Bank's sovereign debt buying program but that is not likely to happen until the end of the first quarter of 2017, at the earliest, one of the sources said.
The ECB could buy just under 3 billion euros of Greek debt, a relatively small amount for the economy, but potentially a major confidence booster.
(Reporting by Balazs Koranyi; Editing by David Chance and Andrea Ricci)