SNAP ANALYSIS: Greece's Papandreou faces big economic challenges

ATHENS (Reuters) - Socialist leader George Papandreou faces a tough task ahead leading Greece at a time of low budget revenues, a growing deficit and an economy on the brink of recession after years of steady 4 percent growth.

IMMEDIATE MARKET CONCERNS

* Local analysts say all eyes will be on Papandreou's ministerial appointments. They say it would be good news for markets if he picks one of the several talented younger economists as finance minister rather than one of the older generation of diehard socialists because it will signal a more pragmatic approach to the economy.

* Rating agencies have said they will closely observe the new government's first moves before reconsidering Greece's credit rating, now the lowest in the euro zone, with an eye on fiscal discipline.

POLITICAL FALLOUT

* Outgoing Prime Minister Costas Karamanlis's bad defeat and his resignation as New Democracy president plunges his party into internal strife, with rivals expected to fight a hard battle for the top post.

* For socialist PASOK, a comfortable majority in parliament offers the party the chance to tackle reforms immediately, unlike their conservative rivals whose one-seat majority made difficult decisions nearly impossible to resolve and led to Sunday's snap elections.

ECONOMIC CHALLENGES

* Seen by foreign investors as the euro zone's riskiest bet, Greece must draft a 2010 budget by November. Its deficit is seen at 6 percent of GDP or more this year, well above the EU limit of 3 percent. Although other euro zone members have similar problems, Greece's huge debt makes such fiscal imbalances more dangerous and the European Commission is unlikely to give much leeway to a long-time budget deficit offender.

Papandreou said he will draft budgets for 3 years ahead instead of one, to gain credibility, and that he will submit a new 3-year plan to Brussels to convince EU partners he is determined to tidy up the fiscal mess.

* Papandreou has promised above-inflation pay rises and a reformed tax system that will put a heavier burden on the rich. His plan hinges on immediately collecting up to 6 billion out of 31 billion euros of uncollected taxes owed to the state. The government has carried them on its books but says they are uncollectable as most of the debtors are bankrupt, so it remains to be seen whether any of this money can enter state coffers.

* The new government must also immediately boost state revenues that have hit record lows due to the consumer slowdown. Analysts say this usually means increasing taxes but, unless the VAT rate is hiked, this is a measure that may not pay off fast, especially given rampant tax evasion.

* New Democracy has frontloaded its debt and says there is a safety cushion to cover state expenses until the end of the year. Papandreou has said he will not borrow more this year unless "absolutely necessary." But with the elections themselves adding a surprise burden, analysts doubt the socialists will find much cash and more borrowing may be inevitable.

IN THE LONGER TERM

* Papandreou has outlined a 100-day plan that will bring five draft bills to parliament, ranging from supporting small business to boosting employment. With unemployment rising and tourism taking a hit, it will be hard to cut the public sector, which employs one in 10 Greek workers. It will be key to use EU funds wisely to boost private business, something the socialists did well in the past. Jobs are a key issue for social peace as well -- youth unemployment fed the country's worst riots in decades in December and unrest has simmered ever since.

* Foreign experts say Greek socialists have a legacy of overspending but a socialist victory would not necessarily mean fiscal relaxation. In fact, with most labor unions under their control it may be easier to implement much needed reforms in the ailing pension system and education, a powder keg of unrest.

* Voters punished Karamanlis for failing on pledges to clean up Greek politics. Papandreou has promised to fight corruption with online state procurements and transparent ministerial decisions. But analysts say the state system is so used to kickbacks that it will take a huge political will and years of efforts to make a difference.

(Editing by Sonya Hepinstall)