* Deal seen paving way for debt relief talks
* Eurogroup must approve deal, meets on May 22
* IMF still wants debt relief to participate
* Greece wants early debt-relief agreement (Adds comment from IMF European director)
By Renee Maltezou
ATHENS, May 2 (Reuters) - Promising to cut pensions and give taxpayers fewer breaks, Greece has paved the way for the disbursement of further rescue funds from international lenders and possibly opened the door to reworking its massive debt.
Officials from both sides reached agreement early on Tuesday on a package of bailout-mandated reforms, ending six months of staff-level haggling. Greek Finance Minister Euclid Tsakalotos announced it with a term associated with papal elections.
“There was white smoke,” he told reporters.
Greece now needs to legislate the new measures, which also include opening up the energy market to competition. That vote is expected on May 16. Euro zone finance ministers would then discuss the disbursement of loans at the next scheduled Eurogroup meeting on May 22.
Athens needs the funds urgently to repay 7.5 billion euro ($8.18 billion) in debt maturing in July.
The Greek government is confident the measures will pass parliament, even though the main opposition party, New Democracy, said it would not support the deal. The government coalition has a small but firm majority.
Government spokesman Dimitris Tzanakopoulos said Athens now wanted a “comprehensive” deal with its lenders on May 22 or a few days afterwards, including on medium-term debt relief.
It was not clear whether the euro zone shared that deadline for the debt-relief portion, but it has in the past pledged to begin talks if various criteria were met.
Germany, one of the main lenders and a hard-liner in forcing Greek reforms, would only say that the deal was a step forward and that work was not yet complete.
Financial markets welcomed Tuesday’s agreement, however. Greek 10-year bond yields fell 40 basis points to 6.08 percent, their lowest since 2014. The main Athens stock index was up 2.8 percent with banks gaining 8 percent.
Tzanakopoulos said Greece wanted the European Central Bank to start buying its bonds as part of the ECB’s asset-purchasing programmes, and that Athens would re-enter the bond market soon after a comprehensive deal.
Meanwhile, the International Monetary Fund’s participation in the bailout remained in question as it views Greek debt as unsustainable at 179 percent of gross domestic product.
IMF European Department Director Poul Thomsen said the reforms would help promote growth in future years with a broader tax base and more fiscal space for better-targeted spending. But he said specific debt relief measures were still needed for the IMF board to consider participating in the bailout financially.
“So that is the discussion that we’re going to have now and in the coming weeks,” Thomsen said. “And once we have the program consisting of both legs - strong policies and strong debt relief measures - we can take it to the board.”
European Union lenders have ruled out forgiving the debt and refused to discuss such things as cutting repayment rates until after a reform-for-cash deal is cut.
Both groups of lenders have also differed markedly about what Greece’s budget is capable of sustaining.
As part of the reforms, Athens has promised to cut pensions in 2019 and cut the tax-free threshold in 2020 to produce savings worth 2 percent of gross domestic product.
If it outperforms its targets, it will be allowed to activate a set of measures offsetting the impact of the additional austerity, which includes mainly lowering taxes.
Athens also agreed to sell coal-fired plants and coal mines equal to about 40 percent of its dominant power utility Public Power Corp’s capacity.
On the budgetary target level, the lenders are now likely to decide among themselves on Greece’s medium-term primary surplus targets, a key element for granting further debt relief.
In a draft document seen by Reuters, the IMF says Greece can reach a primary surplus - the budget balance excluding debt repayments - of 2.2 percent in 2018 and aim at 3.5 percent annually in 2019-2021. It suggests the primary surplus target be reduced to 1.5 percent of GDP thereafter.
Euro zone lenders, however, believe Greece must sustain a 3.5 percent GDP primary surplus target over a longer period.
Last year’s Greek primary surplus was 4.2 percent, according to the lenders. Whether that can be maintained is unclear. ($1 = 0.9165 euro)
Additional reporting by Lefteris Papadimas in Athens and David Lawder in Washington; Writing by Karolina Tagaris and Jeremy Gaunt; Editing by Larry King and Andrew Hay