FRANKFURT (MarketWatch) — European leaders expect euro-zone finance ministers to reach agreement Monday on a long-delayed second bailout for Greece, a spokesman for German Chancellor Angela Merkel said.

Merkel, Greek Prime Minister Lucas Papademos and Italian Prime Minister Mario Monti discussed the situation in a conference call Friday and are “confident” that the ministers will “find a solution to outstanding issues,” the spokesman, Steffen Seibert, said in a written statement.

Renewed expectations for a deal helped lift European equities on Friday, while the euro EURUSD, -0.00% traded at $1.3159, a gain of 0.3% from Thursday. Read more on European markets.

Europe next week: Greece, earnings

Investors have seen numerous false starts, however. European leaders first announced an agreement in principle on the second bailout last October.

Since then, Greece’s worsening economic picture and a related inability to hit budget targets have led to demands that Athens undertake deeper and increasingly controversial cuts and austerity measures.

“None of this solves the fundamental issues of an imploding Greek economy and an unsustainable debt path. And the deal could still unravel over the weekend,” said Kit Juckes, head of foreign exchange at Societe Generale.

The shared currency and U.S. equities were lifted was lifted late Thursday after reports said the European Central Bank was preparing to swap some of its Greek bond holdings — a move seen as potentially helping to ease the country’s debt load and frightening private-sector bondholders into participating in a voluntary bond swap.

Markets also found support on reports that Germany had retreated from earlier calls to delay a large chunk of the 130 billion euro ($171 billion) bailout until after Greek elections in April. Speculation surrounding such a move had sparked fears Greece could be forced into some form of default on March 20, when it faces a €14.5 billion bond repayment.

The Financial Times reported that Athens would face controls on its ability to spend funds. The country would still be required to complete a list of 24 “prior actions” before the end of February as a condition for releasing the aid, the report said.

An agreement by euro-zone finance ministers on Monday would likely be followed by the launch of a long-awaited, voluntary, private-sector bond swap that aims to knock €100 billion off of Greece’s debt load.

The clock is ticking

But in order for Greece to avoid a hard default on March 20, the private-sector-bond swap must be initiated next week, said Erik Nielsen, chief global economist at UniCredit Bank in London.

Meanwhile, several news reports said the European Central Bank is exchanging its holdings of an estimated €50 billion of Greek government bonds for new bonds that would be immune to “collective action clauses” that may be imposed by the Greek government.

Such clauses would allow a majority of bondholders to force all bondholders to participate in a debt swap and could be used if an insufficient number of private bondholders participate in the voluntary bond swap.

The European Central Bank, which bought most of the bonds at a deep discount to face value in a futile effort to hold down Greek borrowing costs, would realize a profit on the exchange, proceeds that would then be channeled back to national central banks, according to a Thursday report in Germany’s Die Welt newspaper.

National central banks within the euro zone could then use the money to reduce outstanding Greek debt, potentially reducing Greece’s debt load by around €15 billion, according to calculations made by Padhraic Garvey, economist at ING Bank in Amsterdam.

What’s more, the European Central Bank appears to be ring-fencing itself from any future debt structuring that could be imposed on private bondholders, Garvey noted. With the central bank out of the way, it would be easier for the Greek government to impose write-downs on all non-European Central Bank investors.

“Whether this is an objective of the ECB’s debt swap is unclear, but it is a potential implication that holders of Greek paper need to be aware of,” he said.