UPDATE 1-Greek PM pleads for some slack in latest EU/IMF inspection
* Lenders begin lengthy, complex inspection on Sunday
* Greece rejects fresh austerity measures
* Review will determine size of fiscal, funding gaps
By Harry Papachristou
ATHENS, Sept 18 (Reuters) - Greece's lenders begin an inspection on Sunday which will determine the size of a third bailout to keep the debt-laden country afloat and add to pressure on its fragile coalition government.
In a review that is expected to stretch at least until the end of October, the "troika" of inspectors from the European Union, the International Monetary Fund and the European Central Bank will take stock of Greek reforms and update their growth and budget forecasts.
They will also require Greece to complete four measures to make its economy more competitive before they release the next bailout instalment of over 1 billion euros in October. On Wednesday Athens implemented the first, and least contentious, of these reforms - a new code for lawyers, intended to help open up the profession.
The lenders will decide the additional savings Athens needs to meet its 2015-2016 budget targets and how much more cash its lenders will need to produce to plug its funding hole at least through to the end of 2014.
Encouraged by GDP figures for the second quarter which suggest that the end of Greece's six-year recession might be near, Prime Minister Antonis Samaras has urged lenders to cut the country some slack and not ask Greeks to take any further cuts in jobs, income and benefits.
"These next few months... are the most politically sensitive," Samaras said on Monday, when high school teachers began an open-ended strike against public-sector layoffs demanded by the lenders.
In a sign of the challenges ahead, civil servants' union ADEDY began a 48-hour strike on Wednesday, backed by a vocal anti-bailout opposition openly calling on citizens to take to the streets to overthrow the government.
"This will be the last chance for populism and extremism to derail the whole (bailout) process," Samaras said, referring to opposition parties demanding that Athens should unilaterally cancel a big chunk of its 320-billion-euro ($427-billion) debt.
Several lawmakers of his two-party coalition, which has a narrow five-seat parliamentary majority, have warned they would vote down any fresh austerity measures put before them.
This might trigger a government crisis similar to the one in June, when the sudden closure of state broadcaster ERT prompted a leftist party to quit the ruling coalition.
Athens needs far fewer savings to meet its 2016 budget targets than the 2 percent of gross domestic product (GDP), or 4 billion euros, lenders are currently assuming, a Greek finance ministry official told Reuters on Monday.
But lenders may find it difficult to soften their stance, given Greece's patchy performance in meeting targets and growing misgivings among lenders called upon to top up the size of its 240-billion-euro bailout.
The government is still short of an end-September target to earmark 12,500 state workers for forced transfer or dismissal, according to government data. Government officials also said they might ask the troika to delay an end-December deadline to do the same with another 12,500 employees.
Greece and its lenders are also at odds over the future of LARCO, Hellenic Vehicle Industry and Hellenic Defence Systems, three loss-making state companies with 2,100 workers which cost taxpayers about 150 million euros a year, the government said.
The government has yet to prepare its two biggest water companies, EYDAP and Thessaloniki Water, for privatisation by settling hundreds of millions of euros in arrears that municipalities owe them.
It is also resisting proposals by some of the lenders to shift some aspects of the privatisation process outside Greece, to speed up asset sales.
Greece has clinched privatisation deals worth 3.6 billion euros since its bailout started in 2010, compared with an initial target to raise 22 billion euros over that period.
Privatisation agency HRADF has been without a head for a month, after its chairman was sacked for using the private plane of a businessman who had just bought a state company to go on holiday.
Lenders are also sceptical about Greek plans to scrap an unpopular but effective property levy collected through electricity bills - key to meeting Greece's 2012-2013 targets. Athens wants to replace it with a new real estate tax that will be fairer but also harder to collect.
A successful review would release another 4.9 billion euros from the EU and the IMF in November and December.
Greece and its lenders face no specific deadline to conclude the talks. Athens has no bonds maturing until January, when two issues with a combined worth of 1.85 billion euros expire.
Athens has already received 216 billion euros in rescue loans out of the 237 billion euros earmarked for it under its current bailout, which expires at the end of next year.
But the conditions attached to the rescue have plunged Greece into its deepest peacetime recession, with the economy shrinking by almost a quarter from its 2008 peak and the unemployment rate almost quadrupling to about 28 percent.
The euro zone is likely to decide on a third bailout for Greece in November, officials told Reuters earlier this month.
The IMF and Greece currently estimate that Athens will need 10-11 billion euros in new financing in 2014-2015 above what the EU and the IMF have agreed to so far.
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