* Greece starts talks with EU, IMF officials
* Finmin to attend IMF’s annual meeting at weekend
* Media, investors see Greece tapping aid deal
* German finmin said to expect Greek aid request
* Portuguese yield spreads, credit default swaps, rise
(Writes through with analyst comment, cuts length)
By Michael Winfrey and Lefteris Papadimas
ATHENS, April 21 (Reuters) - Greece started talks to hammer out details of a potential European and International Monetary Fund aid deal on Wednesday but investors dumped Greek assets and the package faced heated resistance at home and abroad.
Struggling to convince markets that Greece can slash its budget deficit and avoid default, the socialist government is racing to raise 10 billion euros next month, with markets focusing on an 8.5 billion euro bond that falls due on May 19.
Greece is still pushing to finance its debt through market issuance but economists are increasingly convinced it will have to tap the package, and the IMF said the crisis could spread into other euro members if left unchecked.
But a lack of clarity over whether funds would come in time continued to worry market players and produced a series of strong denials that Greece would be allowed to default.
Investors were impatient, however, driving the yield on the 10-year bond to 8.4 percent, the highest since at least 1998, on a flattening yield curve, a signal of growing doubt over the country’s solvency.
The plan also drew fire from workers in Athens and lawmakers in Germany, where voters are deeply opposed to helping chronic offender Greece ahead of an election next month.
Greek Finance Minister George Papaconstantinou started meetings with a mission of mid-level advisers from the IMF, European Commission, and the European Central Bank.
He said the talks, which are meant to outline a three-year economic policy plan -- would last two weeks and a text of the programme would be decided by May 15 at the latest.
“The mechanism will be activated and operate, if Greece asks for it, based on the joint text ... this is the process we have chosen,” Papaconstantinou told a news conference.
Asked if Greece could seek aid before that, he said: “Theoretically, Greece could do it even tomorrow.”
Economists and Greek media have speculated the government could trigger the parachute as soon as this weekend, when Papaconstantinou attends the IMF’s annual meeting in Washington.
In Germany, where Angela Merkel’s government risks losing its majority in the upper house in a May 9 vote, Finance Minister Wolfgang Schaeuble said the government expected Athens to make a formal request for the aid, a source told Reuters.
Schaeuble told a parliamentary committee Greece could not be allowed to default on its debt as this would have incalculable consequences.
“That would bring the stability of the euro into question,” he said.
But a rift appeared in the euro zone leaders’ plans for quickly delivering aid when Germany’s opposition Social Democrats said they opposed “fast-track” approval for the deal in parliament. [ID:nBAE003771]
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For graphics please click on following: Graphic on Greek debt -- r.reuters.com/ryf78j Graphic euro zone peripherals-- link.reuters.com/mam78j Key Greek economic numbers -- r.reuters.com/wax34j Euro zone crisis in graphics-- r.reuters.com/fyw72j Graphics on debt maturity -- here ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
French Finance Minister Christine Lagarde said Paris could mobilise 3.9 billion euros this fiscal year, part of the 6.3 billion it has pledged of the 30 billion from euro zone states.
“The aid will take the framework of bilateral loans,” Lagarde told reporters. She added that the French aid for Greece would have a 5 percent interest charge at three-year maturity.
German Economy Minister Rainer Bruederle said the IMF part of the package could amount to 12 billion euros ($16.13 billion). Greece has yet to ask for the aid which, if activated, would be the largest such bailout ever attempted.
The prospect of aid has raised anxiety among Greeks already hit by public sector wage cuts, a pension freeze and tax hikes that the government imposed last month to cut this year’s budget deficit by one third to 8.7 percent of gross domestic product.
Hundreds of dockworkers blocked passenger vessels at Greece’s largest port, Piraeus, on Wednesday to protest at the austerity measures. About half a million Greek civil servants are planning another 24-hour strike on Thursday.
“Our strike was a necessity due to the government’s fierce attack on our pensions, our employment rights and our income,” said George Perros, a leading member of union PAME.
The IMF also warned about the broader risk from continued market turmoil over Greece.
“The main risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown sovereign debt crisis, leading to some contagion,” the IMF said in its World Economic Outlook. [ID:nWEQ003878]
It also cut its 2010 forecast for Greece on Wednesday, to -2 percent, from -0.1 percent previously, and said the economy of 11 million would contract 1.1 percent in 2011.
Market doubts persist whether Greece can complete the administrative measures necessary to tap the aid and receive it before it has to redeem the 8.5 billion euro bond on May 19.
The worries have shaken the euro currency and pummelled Greek assets, with the premium investors demand to buy Greek bonds over German benchmarks hitting 524 basis points on Tuesday, around 10 times higher than pre-crisis levels.
Investors also wonder whether Athens will be able to tackle the 177 billion euros in debt coming due over the next 5 years, with high debt maintenance costs and a shrinking economy potentially forcing Greece to default or restructure its debt.
Papaconstantinou rejected the idea on Wednesday, saying: “Rumours about restructuring of debt are nonsense.”
Other countries in the euro zone’s periphery have also been hit by the Greek crisis. On Wednesday, the yield spread for 10-year Portuguese bonds over German Bunds widened to 162 basis points from 155 bps at Tuesday’s settlement.
Quentin Fitzsimmons, head of government bonds at Threadneedle, said investors could start targettng other euro zone peripheral states if it looked like Greek default was possible.
“Although a lot of uncertainty remains, we have to believe the Europeans can agree that stability of the region ultimately trumps the interests of individual nation states,” he said.
“Whether this belief is strong enough to shut your eyes and buy is another issue, at this moment, it seems the answer is a resounding ‘no’.” (Editing by Stephen Nisbet)