By Renee Maltezou and Angeliki Koutantou
ATHENS (Reuters) - Greece needs to strike a deal with its creditors by the end of the month to stay afloat, the government said on Monday, as investors ditched Greek bonds in a sign of growing concern about possible bankruptcy.
Despite its precarious position, Athens said it would not abandon its "red lines" in talks with the International Monetary Fund and euro zone partners.
These include a debt restructuring, a lower target for the primary surplus to take in more than it spends apart from debt interest payments, and a pledge to make no further cuts to pensions or wages.
"We are not putting red lines because we have a fetish about these red lines," said Greek Government spokesman Gabriel Sakellaridis. "We think they are necessary elements of a deal so that we don't once again have the problems of the past."
To give itself a breathing space, Greece has proposed Europe's bailout fund pay for 27 billion euros of its bonds held by the European Central Bank, which start maturing in July and August, Finance Minister Yanis Varoufakis said, pledging to repay the fund over a longer term.
Prime Minister Alexis Tsipras said any deal must address Greece's long-term funding troubles and include a "bold" investment programme rather than imposing more pension cuts.
But in a sign of the pressure facing Athens, Germany's central bank said the Greek government, which took office in January promising to roll back years of bitter austerity, needed to honour past reform pledges to stave off insolvency.
"A sustainable solution is not possible without substantial reform in Greece," the Bundesbank said.
Fearing the worst, investors sold off Greece's debt, with two-year bond yields GR2YT=TWEB rising 289 basis points to 23.99 percent - the largest daily raise in more than a month. Ten-year yields GR10YT=TWEB rose 76 bps to 11.54 percent.
Nevertheless, Athens' main stock index .ATG closed up 1.6 percent, reversing an earlier fall of 2 percent.
Sakellaridis said public sector salaries and pensions would be paid this month, but made clear cash was running out, with the state owing the International Monetary Fund some 1.5 billion euros ($1.70 billion) next month.
"There should be a solution in May so we can resolve our liquidity issues," he told a news conference.
Greece has been in talks with its creditors over the past four months about the release of some 7.2 billion euros in aid, and there is a growing feeling that the end game is at hand.
The government says many of the demands of lenders would make the situation worse by hurting economic growth. The labour minister told reporters that restoring collective bargaining rights for unions should also be included in any deal.
"RUNNING ON FUMES"
Greek newspaper To Vima said the European Commission had prepared a possible compromise, proposing that creditors should accept a lower primary surplus target from Greece in return for tax reform and hike in sales taxes.
The report lifted the Athens stock market, but the Commission in Brussels and the Greek government both denied any knowledge of such a proposal.
Although the negotiations have progressed painfully slowly, the European Union's monetary affairs chief said earlier on Monday that the two sides had narrowed their differences and praised Athens for being more constructive on privatisations.
"We have moved closer to common understanding on reforms to be adopted in a number of areas," European Economic and Monetary Affairs Commissioner Pierre Moscovici told reporters in Berlin, citing Greece's value-added tax system, its independent revenue administration and the control of non-performing loans.
But he also saw a rapidly closing window of opportunity. "We have got to conclude before the end of May," he said.
If Greece defaults, it might be forced to abandon the single currency, which could trigger the collapse of an economy that has already been battered by years of bitter austerity.
For months, the government has been borrowing from different parts of the state administration to meet its spending needs, but its options are evaporating.
"Greece is running on fumes and the risk of non-payment of some form is riding high ... These are desperate times and desperate stakes," Rabobank strategist Richard McGuire said.
(Reporting by Deepa Babington in Athens, Stephen Brown in Berlin and John Geddie in London; Writing by Crispian Balmer; editing by Philippa Fletcher)
