(Reuters) - Early bids at an auction to decide the payout due to Greek bondholders who are insured against default showed investors fear for the country's financial future even after a debt restructuring and aid packages.

The first phase of Monday's auction fixed a price of 21.75 cents in the euro for a selection of Greek bonds, broadly in line with market expectations.

The second stage of Monday's auction will set the final price, or recovery rate. This will give the best guidance yet to the value of new Greek bonds issued in the debt swap deal to put Greece on a firmer footing.

These bonds are trading at a huge discount and this tells you the market has doubts about whether Greece will be able to cope but that's been known all along and this auction doesn't change this, said Commerzbank rate strategist Christoph Rieger.

The new Greek 30-year bond was quoted in the secondary market on Monday at about 21 cents in the euro and the new bond maturing in 2023 at about 28 cents but with a wide variation between buying and selling prices in thin trading.

Holders of the CDS (credit default swaps) will receive a cash payout equal to the difference between the recovery rate and the full face value of Greek debt.

The auction is expected to draw a line under fears that activation of the CDS contracts would spark a widespread banking crisis. The final results are due at 1530 GMT.

The International Swaps and Derivatives Association ruled earlier this month that Greece had triggered the payment on the default insurance contracts by using legislation that forces losses on all private creditors.

The auction and ISDA's ruling are good news for investors who bought insurance against default on the bonds of other weaker euro zone countries such as Spain and Portugal because it implies they would get paid if those countries run into trouble.

CHAIN REACTION

Credit default swap contracts were blamed for worsening the 2008 financial crisis and there have been fears that they could start a chain reaction with unpredictable consequences in the euro zone debt crisis.

The payout is expected to total around $2.5 billion, a small sum compared to the losses investors have already taken on money lent to Greece.

In order to secure a desperately-needed financial bailout, Greece cut 100 billion euros off its public debt by forcing private creditors to swap their original Greek bonds for new ones worth substantially less.

But secondary market pricing shows investors believe Athens will need another debt restructuring as austerity steps tied to the aid package might tip the country further into recession, making it difficult to meet deficit targets set by its lenders.

The market is pricing in an elevated probability of a second restructuring from Greece, said ING strategist Alessandro Giansanti.

This will not vanish in coming months because the market wants to see data from Greece and wants to be confident it will be able at some point to have at least flat growth and positive growth to reduce the deficit.

Prices of safe-haven German debt rose on Monday, partly reflecting fears about Greece's financial future.

Giansanti also said the relatively low recovery rate compared with the 40 percent normally assumed for sovereign debt, could see the market pricing slightly higher risk premia on euro zone government bonds.

For me the biggest impact is in the risk premium that investors attach to the yields of these bonds of the euro zone sovereigns, he said. You will know there will be a very low recovery value. That's why you want a higher risk premium in buying these bonds.

(Additional reporting by Marius Zaharia; editing by Anna Willard)