By Lefteris Papadimas and Deepa Babington
ATHENS (Reuters) - Greece's leftist government offered its biggest concessions so far in a race to remove roadblocks in crunch talks with lenders on a cash-for-reforms package on Thursday.
Prime Minister Alexis Tsipras's three-month-old government is under growing 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 was due to meet representatives of the so-called Brussels Group of lenders to discuss which reforms Greece will turn into legislation rapidly in exchange for aid. Athens says it needs fresh aid before a 750 million euro payment to the IMF falls due on May 12.
Elected on promises to end austerity and scrap an unpopular EU/IMF bailout program, Tsipras had so far refused to give ground on so-called "red lines" - pensions, labor reform and state asset sales - that are core to his leftist party's agenda.
But Athens said late on Wednesday it was ready to sell a majority stake in its two biggest ports and to concede 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.
The retreat came after a senior euro zone official involved in the talks on Wednesday said that to secure any deal, Greece would have to make a substantial concession on at least one of three disputed issues - pensions, labor market reform and taxation.
Compounding the pressure on Athens, ratings agency Moody's cut Greece's credit rating deeper into junk territory late on Wednesday due to fears about whether a deal will be found in time to meet upcoming debt repayments.
CONTAGION FEARS LIMITED
The Greek official said Athens could consider a flat VAT rate on all goods and services except 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 are lending to Greece as part of a 240 billion euro EU/IMF bailout.
On increasing the minimum wage - a campaign pledge 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.
Labour Minister Panos Skourletis said Greece could resort to a referendum if there was an impasse with lenders, but expressed confidence a deal would be found that wins the support of lawmakers from the ruling Syriza party.
"I think that the measures will be such that they will be supported by our parliamentary group," he told Greek television.
Athens' move to compromise comes amid growing signs that a Greek default or exit from the euro would have far less effect on the rest of the currency area than the financial chaos feared when Greece last tottered close to bankrupty in 2012.
While Greece has seen its two-year bond yields surge 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.
In Portugal, a fellow euro zone weakling that exited its bailout last year, a dual bond issue that raised 2.5 billion euros on Wednesday meant the country had completed nearly two-thirds of its 2015 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.
"The direct impact might be limited because of Greece's limited trade links and lower financial market exposure to Greece in other euro area countries. But its exit could nevertheless cause a confidence shock and disrupt government debt markets," he said.
(Additional reporting by Angeliki Koutantou, Writing by Deepa Babington; Editing by Paul Taylor)