ATHENS Greece's borrowing costs hit a new high on Wednesday after the government said the country's banks had asked for billions of euros in support and euro zone states argued over the conditions of potential bailout loans.
Investors shed bank shares and drove up the premium demanded for buying Greek rather than German bonds, fuelling a vicious cycle of economic downturn and market skepticism over Athens' ability to end a debt crisis shaking the euro zone.
Prime Minister George Papandreou hailed a euro zone/International Monetary Fund safety net deal agreed last month to help the country of 11 million avoid bankruptcy and said it rendered the crisis manageable.
But the banks' request for extra help highlighted the problems facing the entire Greek economy, expected to shrink at least 2 percent this year partly as a result of austerity measures imposed to tackle the deficit.
Hit by a series of credit rating downgrades, the banks asked to tap some 17 billion euros ($22.7 billion), mostly in state guarantees, that remain from a 28 billion euro support scheme launched in 2008 to help them cope with the credit crisis.
"They want to have additional safety, now that the economy and the banking system are under pressure," Finance Minister George Papaconstantinou said.
Greek bank shares .FTATBNK closed 4.2 percent lower after government yield spreads hit a new euro lifetime high, meaning higher financing costs for Greek lenders.
The 10-year Greek/German government bond yield spread widened to 413 basis points -- its largest gap in the lifetime of the euro currency bloc, from around 392 bps at the European close on Tuesday. The cost of insuring Greek debt rose to level higher than Iceland's for the first time since 2005.
"We don't expect a fast, magic drop in spreads," Papaconstantinou told Greek ANT1 TV. "There is still suspicion surrounding the country. There are doubts about whether we will make it."
He added that the 2009 budget deficit would be 12.9 percent of gross domestic product, slightly above the government's previous 12.7 percent estimate.
"TOO MUCH CHATTER"
Struggling to impose tough austerity measures without prompting social unrest, Papandreou said the EU-IMF deal had given Greece the backing it needed to beat the crisis.
"This agreement is clearly a great success for our country and the European Union," he said. "With this safety net we are in a situation which is manageable under any circumstances."
But economists have said the support package has left many unanswered questions, including the extent of IMF involvement and what has to happen for euro zone states to activate it.
Newspapers criticized the government for leaks and contradictory statements they said had made it easier for speculators to take advantage of the country's financial plight and push spreads higher in thin post-Easter trading.
"Endless torture with the spreads," the center-left Ethnos newspaper splashed across its front page. "The government's economic team suffers from a lack of coordination and a surplus of chatter," the newspaper said in an editorial.
Papaconstantinou rebuked unnamed finance officials on late night television on Tuesday after having to deny a report that Greece was seeking to renegotiate the rescue plan.
"Unfortunately, too many unqualified people are speaking, talking off the top of their heads," he said.
He said Athens could not afford to borrow at current rates for a long time but had no intention of using the EU-IMF emergency funding mechanism.
In Brussels, a euro zone source said the bloc's members were split over the rate of interest they should charge Greece if Athens asked for emergency loans, with Germany and the Netherlands demanding higher rates to discourage Greece or other countries from straying from the euro's budget guidelines.
"It is all a question of moral hazard... By charging rates that are too low you could be understood to encourage such behavior," the source said, without giving exact numbers.
Member states are also still feeling their way out of recession, with data released on Wednesday showing euro zone growth stalled in the last quarter of 2009, while a benchmark survey suggested the recovery, while slowly gaining traction, remained uneven.
The Financial Times reported on Monday Germany was insisting aid lending to Athens should be at close to recent market rates of 6.0-6.5 percent, while other governments argued Greece should pay the 4.0-4.5 percent Ireland and Portugal pay in the market.
The Brussels source said the discussions were theoretical because Greece was unlikely to use the emergency aid mechanism.
IMF experts began a two-week mission to Greece to give advice on implementing public spending cuts and revenue increases designed to cut the budget deficit by around a third to 8.7 percent of gross domestic product.
The mission, which is not expected to discuss loans, comes ahead of the next joint assessment of Greece's progress by the European Commission, the European Central Bank and the IMF due later this month.
The government says the austerity measures are on track and ahead of schedule. But economists say they will be complicated by a deeper-than-forecast recession and higher-than-budgeted borrowing costs.
Athens needs to tap markets for about 11 billion euros in May, including 8.5 billion euros of a 10-year, 6.0 percent bond maturing May 19.
Among the factors fuelling market jitters are continuing uncertainty about when and how the rescue mechanism would come into play, what the IMF's role would be and what interest rates Greece would have to pay on any emergency loans.
The higher rate would compound Athens' deficit woes, although a government official said April was covered.
"Having borrowed for April, it can allow its economic program to run its course," the official said.
(Additional reporting by Ingrid Melander, Renee Maltezou, Angeliki Koutantou, and Lefteris Papadimas in Athens, Sarah Marsh and Paul Carrel in Berlin and David Lawder in Mumbai; writing by Michael Winfrey; editing by ... )