By Lefteris Papadimas and Deepa Babington
ATHENS (Reuters) - Greece's government signalled the biggest concessions so far as talks with lenders on a cash-for-reforms package started in earnest on Thursday, but tried to assure leftist supporters it had not abandoned its anti-austerity principles.
Prime Minister Alexis Tsipras's three-month-old government is under heavy pressure at home and abroad to reach an agreement with European and IMF lenders to avert a national bankruptcy. A new poll showed over three-quarters of Greeks feel Athens must strike a deal at any cost to stay in the euro.
An enlarged team of Greek negotiators began talks with the so-called Brussels Group representing the euro zone, the International Monetary Fund and the European Central Bank to discuss which reforms Greece will turn into legislation rapidly in exchange for aid.
The talks are expected to continue through the May Day holiday weekend until Sunday, with Tsipras willing to step in to speed things up if necessary, a Greek official said. In a sign of seriousness, both sides agreed on a news blackout at the meeting, a euro zone official said.
Greece wants an interim deal by next week, hoping this will allow the ECB to ease liquidity restrictions before a 750 million euro payment to the IMF falls due on May 12. Athens has suggested it will struggle to pay the instalment.
Before that, it also has to repay 200 million euros to the IMF by May 6, although this is expected to be less of a problem.
The head of the Eurogroup of euro zone finance ministers, Jeroen Dijsselbloem, said at a meeting with members of the Dutch parliament that the bloc was prepared for any outcome.
Asked whether there was a "plan B" should Greece default or be forced out of the euro zone, he said: "(Is) the euro zone prepared for eventualities, the answer to that is: 'yes'."
Elected on promises to end austerity and scrap an unpopular EU/IMF bailout programme, Tsipras had so far refused to give ground on his "red lines" - pensions, labour reform and state asset sales.
After a preparatory meeting of senior Greek officials on Wednesday, a top government official said Athens was willing to sell a majority stake in its two biggest ports and compromise on value-added tax rates and some pension reforms, in the clearest signal yet that it is ready to back down for a deal.
"The Greek government is ready for an honest solution which will unlock financial aid from partners and put an end to the economic asphyxiation the bailouts have caused," Finance Minister Yanis Varoufakis, who was sidelined from the bailout talks this week to appease lenders, told Sto Kokkino radio.
However Tsipras's office on Thursday denied any climbdown, seeking to assuage hardliners in his Syriza party as he tries to satisfy Greece's creditors before its coffers are empty.
"The government is sticking to its red lines," an aide to the premier said on condition of anonymity. "The government does not have the popular mandate to reach a deal that crosses red lines and it won't do that."
CONTAGION FEARS LIMITED
The top Greek official said Athens could consider a flat VAT rate on all goods and services except drugs, foods and books and could adjust supplementary pension payouts, though it insists on not cutting those below 300 euros a month.
The so-called "13th month" payment to pensioners has been a target of some euro zone finance ministers whose countries have less generous systems but have been lending to Greece as part of the 240 billion euro EU/IMF bailout.
On increasing the minimum wage - a campaign promise by Tsipras that is strongly opposed by lenders - the official said Athens would consult with the OECD and the International Labour Organisation before taking any action, the official said.
Athens's move to compromise comes amid signs that a Greek default or exit from the euro could have far less effect on the rest of the currency area than the chaos feared when Greece last tottered close to bankruptcy in 2012.
While yields on two-year Greek bonds have surged to as high as 30 percent on fears of a default, other fragile peripheral euro zone nations have seen borrowing costs fall to record lows due to an ECB bond-buying plan.
In the latest sign that contagion from a Greek default would be limited, Spain's economy grew at the fastest rate since 2007 in the first three months of this year, data showed on Thursday.
Portugal, a fellow euro zone weakling that exited its bailout last year, has completed nearly two-thirds of its 2015 bond issuance needs, limiting the potential of a setback if yields rose on worries over Greece.
However, Moody's cautioned in a report that a Greek departure could have longer-term consequences.
"The impact of a Greek exit should not be underestimated," said Alastair Wilson, Moody's managing director for global sovereign risk, saying the direct impact might be limited but an exit could cause a confidence shock and disrupt debt markets.