* Deal struck after six months of talks
* Paves way for aid to cover bond repayment in May
* Boost for PM Samaras ahead of May EU, local elections
* Greece eyes bond market sooner than planned-officials
By Harry Papachristou and Lefteris Papadimas
ATHENS, March 18 (Reuters) - Greece and its international lenders struck a deal to unlock the next tranche of loans under its rescue package on Tuesday, ending six months of negotiations that Athens called its “toughest” review since being bailed out.
The deal paves the way for Greece to repay nearly 10 billion euros of bonds due in May and bolsters expectations it could soon return to the bond markets for the first time since its debt crisis escalated four years ago.
Athens and its European Union and IMF lenders had been haggling over the bailout review since September, making it the longest inspection of the country’s finances since Greece was first rescued from bankruptcy by the creditors in 2010.
“This review was the toughest we’ve had so far,” Finance Minister Yannis Stournaras told reporters after a week of marathon talks that ended in the early hours of Tuesday.
“A difficult negotiation is over.”
The talks stumbled at various points over reforms to make the Greek economy more competitive, mass layoffs demanded by the lenders and the capital shortfall faced by battered Greek banks.
The agreement is also a much-needed shot in the arm for Prime Minister Antonis Samaras, who is under pressure to show light at the end of the tunnel to austerity-weary Greeks ahead of tough European and local elections in May.
He immediately promised voters that the deal with lenders came without any additional demands for austerity, and promised a 500-million-euro windfall to poor, austerity-hit Greeks that will be funded out of the primary budget surplus Greece unexpectedly posted last year.
“A long period of ordeals is ending today and we are making a new start,” the prime minister told a joint news conference with Stournaras.
A senior Greek finance ministry official, speaking on condition of anonymity, said that primary surplus was about 3 billion euros, much higher than previous estimates.
Samaras, whose New Democracy party is trailing the rival, anti-bailout Syriza party in the polls, also said he would lower social security contributions and spend an additional 1 billion euros to settle government arrears to suppliers this year.
Greece has no pressing funding needs until May, when 9.3 billion euros of its bonds expire, the biggest refinancing hump the country will face in the next three decades. The next tranche of aid will be released by the end of April, allowing Greece to meet its May obligations, an EU diplomat said, on condition of anonymity.
After nearly going bankrupt and crashing out of the euro zone in 2012, Greece’s fortunes have revived sharply in recent months as a six-year recession shows signs of bottoming out and investor confidence in the country’s prospects is rising.
In the latest sign of optimism, Piraeus Bank, the country’s second-biggest lender, became on Tuesday the first Greek lender to regain bond market access since 2009, when the country plunged into crisis.
The bank’s 500 million euro three-year unsecured bond issue attracted bids and was set to be priced at 5.125 percent.
Also on Tuesday, Greece’s debt agency sold 3-month treasury paper at the cheapest borrowing cost since its debt crisis escalated in early 2010, with foreign investors buying up half of the issue. Athens raised 1.3 billion euros, pricing the T-bills at a yield of 3.10 percent.
In Athens, the focus has increasingly turned to when Greece can return to the bond markets as 10-year government bond yields have dropped below 7 percent, their lowest level since the country’s 237-billion euro bailout started.
Athens officially plans to sell a small five-year bond at some point in the second half of the year. But falling bond yields for peripheral euro zone countries have encouraged Greek officials to consider tapping markets even earlier, in a move that would bolster Samaras’s election prospects in May.
“Market conditions are improving much faster than we had expected and this means that we could tap markets sooner than we planned,” a senior government official told Reuters on condition of anonymity.
“A successful market return by the banks will help us a lot to go out to the markets ourselves,” the official added.