Greece Nears Debt Deal In May As Money Runs Low

(Reuters) - Greece is near a cash-for-reforms deal with its euro zone partners and the International Monetary Fund that would help it meet debt repayments next month, the country's finance minister said on Monday, as worries persist over a possible bankruptcy.

Athens has been defending its "red lines" in talks with lenders, refusing to yield on further pension cuts and more labor market liberalization to clinch a deal that would release remaining bailout aid, despite a pressing cash crunch.

"I think we are very close (to a deal) ... let's say in a week," Yanis Varoufakis told Star TV channel late show Ston Eniko. "Another currency is not on our radar, not in our thoughts."

Greece faces payments of about 1.5 billion euros to the IMF next month and 6.7 billion euros to redeem government bonds that are held by the European Central Bank and mature in July and August.

To give itself breathing space, it has proposed Europe's bailout fund pay for 27 billion euros of its bonds held by the European Central Bank, which start maturing in July and August, Varoufakis said, pledging to repay the fund over a longer term.

The move was the latest attempt by the outspoken minister, who has been sidelined in negotiations with creditors, to revive the idea of a debt swap to help Athens manage its upcoming debt payments but has not received any interest from lenders.

Greece's EU and IMF lenders have refused to talk about debt relief until the country reaches a reforms deal first.

While the leftist-led government hopes to be in a position to meet debt repayments and pay government workers and pensioners in June, it will opt for the latter if it faces a dilemma, its finance minister said.

Athens wants a deal to include a debt restructuring, a lower target for the primary surplus to take in more than it spends apart from debt interest payments, and a pledge to make no further cuts to pensions or wages.

"We are not putting red lines because we have a fetish about these red lines," said Greek government spokesman Gabriel Sakellaridis. "We think they are necessary elements of a deal so that we don't once again have the problems of the past."

Greece has offered concessions including tax measures to plug a fiscal gap this year and selling state assets to appease its lenders.

Prime Minister Alexis Tsipras said any deal must address Greece's long-term funding troubles and include a "bold" investment program rather than imposing more pension cuts.

But in a sign of the pressure facing Athens, Germany's central bank said the Greek government, which took office in January promising to roll back years of bitter austerity, needed to honor past reform pledges to stave off insolvency.

"A sustainable solution is not possible without substantial reform in Greece," the Bundesbank said.

Fearing the worst, investors sold off Greece's debt, with two-year bond yields GR2YT=TWEB rising 289 basis points to 23.99 percent - the largest daily raise in more than a month. Ten-year yields GR10YT=TWEB rose 76 bps to 11.54 percent.

Nevertheless, Athens' main stock index .ATG closed up 1.6 percent, reversing an earlier fall of 2 percent.

Sakellaridis said public sector salaries and pensions would be paid this month but made clear cash was running out.

"There should be a solution in May so we can resolve our liquidity issues," he told a news conference.

Greece has been in talks with its creditors over the past four months about the release of some 7.2 billion euros in aid, and there is a growing feeling that the end game is at hand.

The government says many of the demands of lenders would make the situation worse by hurting economic growth. The labor minister told reporters that restoring collective bargaining rights for unions should also be included in any deal.

"RUNNING ON FUMES"

Greek newspaper To Vima said the European Commission had prepared a possible compromise, proposing that creditors should accept a lower primary surplus target fromGreece in return for tax reform and a hike in sales taxes.

The report lifted the Athens stock market, but the Commission in Brussels and the Greek government both denied any knowledge of such a proposal.

Although the negotiations have progressed slowly, the European Union's monetary affairs chief said earlier on Monday that the two sides had narrowed their differences and praised Athens for being more constructive on privatizations.

"We have moved closer to common understanding on reforms to be adopted in a number of areas," European Economic and Monetary Affairs Commissioner Pierre Moscovici told reporters in Berlin, citing Greece's value-added tax system, its independent revenue administration and the control of non-performing loans.

But he also saw a rapidly closing window of opportunity. "We have got to conclude before the end of May," he said.

If Greece defaults, it might be forced to abandon the single currency, which could trigger the collapse of an economy that has already been battered by years of bitter austerity.

For months, the government has been borrowing from different parts of the state administration to meet its spending needs, but its options are evaporating.

"Greece is running on fumes and the risk of non-payment of some form is riding high ... These are desperate times and desperate stakes," Rabobank strategist Richard McGuire said.

($1 = 0.8808 euros)