Scenarios: Can Greece meet its 2010 deficit goals?

ATHENS (Reuters) - Greece's ambitious plan to cut its deficit by up to 15 billion euros ($20 billion) this year carries high risks for the government as it could deepen the recession and prompt a social backlash.

Government officials say a planned reduction in spending will allow Greece to comfortably meet its pledge to cut the deficit by more than 4 percentage points, even in a tough economic environment.

In a three-year stability and growth plan agreed with the European Commission, Greece plans to cut its deficit this year to 8.7 percent of GDP and bring it to below 3 percent by 2012.

Based on officials' statements, conversations with analysts and fiscal targets set out in the stability and growth plan, here are three scenarios Greece faces, with implications for financial markets:

GOVERNMENT MEETS OR EXCEEDS FISCAL TARGETS

SCENARIO: Reforms to crack down on waste and tax evasion are implemented successfully and the economy does not shrink more than 2 percent, as currently estimated by the Greek central bank and the IMF.

PROBABILITY: Low. Economists expect the economic downturn to be worse than projected. That would undermine income tax revenues and make it tough for the government to achieve its target of boosting net tax income by 11.7 percent this year.

Other plans may also be a stretch. The government has penciled in 1.7 billion euros in revenues from cracking down on rampant tax evasion, but success relies heavily on the performance of the tax inspectors. EU inspectors have already said the target is over-ambitious.

The government also plans to cut hospital costs by 2.4 billion euros, with some 700 million euros in savings from better management, but this hinges to a large extent on the cooperation of hospital managers.

MARKET IMPLICATIONS: A deficit cut of 4 percentage points or more compared to 2009 would be a positive surprise for investors and make it easier for Greece to tap financial markets, perhaps even in this year.

GREECE NARROWLY MISSES DEFICIT TARGETS

SCENARIO: Deficit cut measures are moderately successful and the economy shrinks by about 3 percent.

PROBABILITY: High. Many analysts expect Greek GDP to shrink by 3 percent or more this year, making it the country's deepest recession since 1974.

Domestic demand is expected to contract even more, by about 5 percent. This could undermine revenue targets, despite steep increases in VAT and other consumption taxes.

Greece expects 1.4 billion euros in additional revenues after the main VAT rate was increased by 2 percentage points to 21 percent. Greece also expects additional revenues of 4.7 billion euros from closing tax loopholes, a one-off tax on large companies and higher excise duties on tobacco, alcohol and mobile phones. But a deeper recession could mean higher unemployment and that would cast doubt on plans to reduce social security subsidies by 540 million euros.

The risk of a surge in debt servicing costs would be eliminated if Greece was bailed out by the EU and the IMF at interest rates of around 5 percent. Greece has already earmarked 600 million euros for extra debt servicing costs this year.

MARKET IMPLICATIONS: A deficit cut of merely 3 percentage points, followed by similar cuts in the next years, would not be a surprise. At the same time it would make Greece dependent on EU and IMF support for at least three years, if not longer. Greece could slowly rebuild confidence but this could be lost very easily at the first sign of a deterioration in budget figures.

GREECE WIDELY MISSES BUDGET TARGETS

SCENARIO: The economy shrinks by more than 4 percent, with tax revenues collapsing and Greece widely missing its deficit targets.

PROBABILITY: Low. The Greek public sector is in such disarray that even elementary spending and structural reforms could generate significant deficit cuts, even in case of very deep recession. The government has already legislated wage and pension cuts in the public sector of about 2.7 billion euros.

Further cuts could spark public unrest, which would derail consolidation efforts. Defense spending cuts of 460 million euros are also underway. The government has capped pharmaceuticals prices by about 1 billion euros to limit hospital spending. The EU has pledged to speed up disbursement of an extra 1.4 billion euros earmarked for infrastructure.

MARKET IMPLICATIONS: Any failure to visibly improve Greece's finances would destabilize the government of Socialist Prime Minister George Papandreou. It would also shut Greece out of financial markets for years, raising the possibility of debt restructuring or default.

Failure to improve its finances would also raise pressure on Greece to withdraw from the euro zone, at least temporarily, and could undermine the credibility of the European single currency. It would also raise market pressure on countries such as Portugal, potentially making it more expensive for them to borrow.

(Editing by Lin Noueihed)