UPDATE 3-Calls for more time as Greece faces deficit squeeze
* Greek finmin sees economy shrinking 25 pct by 2014
* Says 2012 primary deficit wider than expected
* IIF urges EU/IMF to extend aid plan, lower lending rates
By Nick Edwards and Harry Papachristou
BEIJING/ATHENS, Sept 18 (Reuters) - Greece will meet its nominal 2012 deficit reduction targets but faces growing strain because of the deepening recession, Finance Minister Yiannis Stournaras said on Tuesday as pressure grew on international creditors to give Athens more time to catch up.
Forecasting that by 2014, the Greek economy would have shrunk by 25 percent since the start of the crisis, Stournaras said Athens would broadly meet a target of cutting the 2012 primary deficit, excluding debt servicing costs, to 2 billion euros in nominal terms.
But he said the primary deficit figure would reach 1.5 percent of gross domestic product, compared with a previous estimate of 1 percent, as the recession bit and he repeated a plea for more time from the European Union and International Monetary Fund troika.
"Otherwise, there is a great risk of prolonging the negative consequences for the economy and society," he told a conference in Athens.
Speaking in Beijing, Charles Dallara, the chief negotiator representing Greece's private sector creditors, said Athens should get cheaper rates on its 130 billion euro aid deal and at least two more years from the EU and IMF to meet its targets.
But better terms could only come after the government of conservative Prime Minister Antonis Samaras delivers on his commitments to fiscal reform, Dallara, managing director of the Institute of International Finance (IIF), told reporters.
"Once that has been done, and I am confident it will be done, Europe and the IMF should move quickly to extend the adjustment period for at least two years and provide the modest additional financial support for that extension to be effective," he said.
He said responses to the Greek debt crisis placed too much emphasis on short-term austerity and not enough on improving the country's longer-term competitiveness.
Samaras, leading a country in its fifth year of recession at a time of rising discontent at home, wants two more years to implement economic reforms tied to the aid package in order to soften their impact.
On Tuesday, he received a glimmer of encouragement when Greece posted its first monthly current account surplus in more than two years for July, helped by a shrinking trade deficit and stronger shipping revenues.
Inspectors from the so-called troika of the IMF, European Commission and the European Central Bank (ECB) are evaluating Greek progress on agreed targets before releasing the next, 32 billion euro ($41.3 billion) tranche from the giant aid package.
They know that denial of this aid could tip Greece into bankruptcy, an event that risks shaking the euro zone to its foundations again just as huge efforts have been devised to shore up Spain and so safeguard the single currency.
Athens, where Europe's debt crisis began nearly three years ago, has been encouraged in its demands by a decision to give Portugal - also the recipient of an international loan package - more time to meet fiscal targets as recession saps Lisbon's ability to deliver.
Greece's partners are reluctant to talk about a possible extension for fear of lessening the pressure for reform.
But Socialist PASOK leader Evangelos Venizelos said that the troika was already working on the assumption that Greece would get a two-year delay to reduce its deficit.
"In the mind of the troika, the extension is a fact. Technical discussions are carried out under the assumption of a two-year extension," he told a party conference.
He said the additional financing Greece would require for an extension could be secured in a way that would not put extra strain on European taxpayers.
He said the recapitalisation of Greek banks could be financed through the ESM and EFSF, the European rescue funds, Greek bonds could be bought back at discounted prices and the European Central Bank could return to Greece the profits from its Greek bond portfolio.
Cash-strapped Greece must come up with nearly 12 billion euros of extra cuts for the next two years to get the money, and it has fallen behind in reforms.
IMF Managing Director Christine Lagarde said last week that lenders may agree to some sort of extension.
But Austrian Finance Minister Maria Fekter said in a newspaper interview released on Sunday that Athens would get "a few weeks" more time to meet terms of its international rescue. The idea of having a year or two was dead and no extra money was on the table, she said.
Greece's second loan deal envisages Athens returning to international markets by 2015, but with two consecutive parliamentary elections in May and June after political parties struggled to form a coalition, the country lost ground on its reform agenda. Deepening recession has also made the debt targets less attainable.
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