Without EU bailout, Greece faces Sisyphean task

ATHENS (Reuters) - Greece can raise enough funds to stumble along for years without EU aid but concrete support from its partners will be key to escaping a debt crisis shaking the euro zone.

Since a new government uncovered holes in Greece's finances, markets have been punishing Athens for its profligacy and dodgy statistics by demanding higher interest. That, in turn, has deepened a spiral of borrowing just to fund existing debt.

Greek Prime Minister George Papandreou has warned of the risk of imminent bankruptcy while a poll by Bank of America Merrill Lynch shows that more than one in five fund managers see a Greek debt default as likely.

Some 24 percent of fund managers believe Greece can sort out its own debt crisis, however, and economists are inclined to agree, pointing out Papandreou's dire warnings are designed to convince a restive electorate of the need for urgent reform.

Greek officials have told euro zone partners they cannot go on paying 6-6.5 percent interest rates for long and, as EU finance ministers thrash out a possible aid package, Papandreou has insisted he just wants to borrow at normal euro zone levels.

But economists say the risk of default from high interest rates is not imminent. As long as markets are willing to lend to Greece at current rates, it can continue to raise enough to pay the bills.

"A decline in yield spreads below the level of 200 basis points is unlikely," said Gikas Hardouvelis, chief economist at EFG Eurobank and professor at the University of Piraeus.

EXTRA BURDEN DOABLE

Even if spreads stay at current levels of about 300 basis points and Greece does not manage to bring its borrowing cost down to 5.3 percent from the 6.3 percent it paid to raise 5 billion euros this month, it would not be a catastrophe.

"This means an extra burden of about 500 million euros this year, about the cost of a submarine, which is doable and not something that will make Greece default," he said.

With a debt burden of 272 billion euros in 2009, Greece wants to borrow 53 billion this year. A large part of that borrowing will be to service existing debt and the crunch comes in April and May when about 20 billion euros will mature.

"If the government can only borrow at 6.5 percent from now on, we estimate the average interest rate on its remaining debt would rise from about 4.3 percent in 2009 to about 5.5 percent in 2013," said Ben May of Capital Economics.

Assuming 300 billion euros worth of debt, that would increase Greece's annual interest costs to about 16.5 billion euros from 12.9 billion euros -- painful but not insurmountable for an economy that generates 240 billion euros a year.

Greece managed to survive much higher debt interest payments in the early 1990s but there is no question that higher rates will prolong the misery and that an EU aid package is just what the markets want to give Greece some breathing space.

The biggest risks, economists say, are any failure to deliver on deficit-cutting promises or a rapid deterioration in the economy. These would unnerve investors further and lead to more downgrades that would drive up funding costs.

With GDP set to fall well short of government forecasts, concrete EU support could reduce the perceived risk attached to Greek debt, driving down the cost of funding and making it easier for Greece to cut its deficit more aggressively without further hurting the economy.

SISYPHEAN TASK

Without a concrete package of EU support, spreads are unlikely to shrink and Greece will be trapped in borrowing just to pay off old debt -- a Sisyphean task like that of the mythological king condemned to keep rolling a boulder up a hill only for it to roll back down again.

Such a scenario of course might be liable to disruption by social unrest in a country known for volatile protests, and the government does not have limitless time to convince the public that its painful measures will bear fruit.

"You cannot be taking austerity measures, asking people for sacrifices, cutting salaries, just to be paying it away to higher interest costs," said Michael Masourakis, an economist at Alpha Bank.

The EU, reluctant to throw a lifeline to a repeat offender like Greece without conditions attached, will be careful not to send the wrong signal to other euro zone periphery countries, threatened with contagion from Greece.

"Germany will insist on terms that are so humiliating that countries like Italy and Spain and Portugal will not want to follow Greece but not so humiliating that Greece cannot accept them," said Gabriel Stein, director of Lombard Street Research.

Economists agree that sticking to austerity cuts this year and generating primary budget surpluses is the key to achieving an ambitious target of bringing the deficit down to 3 percent of GDP in 2012 from 12.7 percent last year.

It will also help restore market confidence in Greece which analysts say is another key element in the country's escape from a vicious debt cycle.

"How can this (cycle) be broken? First by stabilizing market expectations to avoid escalation of spreads and then by stabilizing the debt dynamics via primary surpluses," said Platon Monokroussos, an economist at EFG Eurobank.

(Additonal reporting by George Georgiopoulos; editing by Stephen Nisbet)