(repeats piece first issued on March 8)
By Ingrid Melander
ATHENS, March 8 (Reuters) - Greece is under huge pressure from markets and the European Union to deliver on pledges to slash a spiralling budget deficit that has shaken the euro zone.
After being hammered by markets for months, the euro zone member has won some respite with a new austerity package and a successful but very costly 10-year bond issue last week.
But it faces tough challenges in implementing its plan and servicing its debt, at a time when discontent is rising among the public and in the ruling socialists' own ranks.
Worries in financial markets that Greece may not be able to service its heavy debt have raised questions over a possible spill-over to other euro zone members and over whether fellow European states would come to Greece's rescue.
Following are key factors investors are watching:
CUTTING THE DEFICIT
Greece stunned markets in October last year when it revealed that its budget deficit for 2009 would be 12.7 percent of GDP -- over twice as big the previous estimate and more than four times the 3 percent ceiling imposed by the EU. Debt is forecast at 120.4 percent of GDP this year, the highest in the euro zone.
The government announced on March 3 a 4.8 billion euros package including across-the board cuts in the public wage bill, after initial pledges to cut the deficit to 8.7 percent of GDP this year failed to convince. [ID:nLDE621162]
Markets showed some relief at the deficit cutting plan and tentative EU support, pushing Greek bond yields and CDS rates lower -- yields on Greek bonds fell below 6 percent for the first time since mid-February [ID:nLDE6222DB]
WHAT TO WATCH:
-- Signs of increasing opposition from unions, public opinion and within the ruling PASOK party (see below).
-- Implementation of the plan. EU policymakers and rating agencies welcomed the measures but warned that Greece's lack of credibility is such they will only believe it when they see it.
* The EU executive Commission has put the country under close monitoring. Athens must report to Brussels by March 16 and follow with quarterly reports from mid-May. The reports will show Greece's progress on its deficit targets and more detailed plans for the coming years.Analysts see this unprecedented short leash as necessary because of accumulated mistrust in Greek statistics. [ID:nLDE6120H9].
* Moody's has warned that anything short of near perfect delivery could trigger a rating cut, and Standard & Poor's said it could downgrade Greece within the next couple of weeks. Fitch also has the country on negative outlook. Any new downgrade would pressure Greek bonds and the euro. [ID:nLDE61N2KL]
* Much of the 4.8 billion euro austerity plan, including fuel tax hikes, public servants bonuses cuts and a pension freeze has already been enacted. The government plans a tax bill later in March and a pension bill in April to increase the effective average retirement age to 63 from 61. [ID:nLN227866]
-- Macro economic risks. Greece's official forecast of a 0.3 percent contraction of the economy this year is widely believed to be too optimistic. Unemployment is growing, tourism is not seen doing well and credit is tightening. All of this could affect Greece's capacity to meet its targets this year, by affecting GDP and in turn government revenues.
SOCIAL UNREST WORRIES
Opposition to the government cutbacks is on the rise with almost daily protests and regular strikes. Police clashed with dozens of stone-throwing youths in Athens in front of parliament during a march on Friday but protests are much more low-key than the riots that rocked Athens in December 2008.
Opinion polls show the public is becoming increasingly opposed to austerity measures largely deemed as unfair but sees no alternative and believes they will be enforced. [nLDE62501I]
Prime Minister George Papandreou's cost-cutting plan also faces opposition within his party. Labour unions representing half the country's 5 million-strong workforce will stage their second 24-hour strike two weeks on Thursday.
This comes against a backdrop of discontent among leftist and youth groups who just over a year ago triggered Greece's worst riots in decades.
WHAT TO WATCH:
-- Signs that opposition to the measures is increasing further as tax hikes and cuts kick in. The VAT (sales tax) increase will start on March 15, fuel and tobacco tax hikes are already in force. Civil servants will see their Easter bonus cut by 30 percent.
-- Renewed unrest would unsettle bond and CDS markets, particularly if they feared reforms would be watered down as a result. S&P said it could lower Greece's rating if it loses public support.
-- Increasing internal splits, most likely around the currently marginalised socialist old guard, might imperil Papandreou's government and would also worry investors.
-- Small-scale bombings and other similar violence could further sour investor sentiment.
SATISFYING THE MARKETS
Ultimately, Greece's fate will be decided by whether markets retain appetite for its debt. Markets appear still willing to lend, as last week's heavily oversubscribed bond issue showed.
But to attract investors, Greece has to sell its debt at ever steeper yields -- at 6.4 percent last week. This further strains the budget and could choke off recovery, with banks charging higher interest rates to households and businesses.
The cost of insuring Greek debt against default has risen sharply. The euro EUR= has fallen on the Greek crisis.
Greece has already borrowed about 18 billion euros out of some 53 billion euro targeted for 2010. It needs to refinance some 20 billion euros of debt maturing in April and May.
WHAT TO WATCH:
-- Does market appetite for Greek debt remain? If it does not, or if yields become prohibitively high, Greece might need to turn elsewhere for help.
-- How successful is its upcoming bond roadshow in Asia and the United States? Greece says it wants to diversify its borrowing base but has set no targets or date for the roadshow.
-- Do sovereign debt worries elsewhere -- perhaps Dubai, Ukraine or another troubled fringe euro zone economy -- further dent appetite for perceived risky government debt?
-- EU blame on speculators and possible talks on dampening speculation on CDS markets at an EU meeting on March 16. Some politicians say speculators using CDSs, intended to insure against any risk of debt defaults, are amplifying the country's problems. Industry officials say the CDS market simply reflects rather than creates problems [ID:nLDE62721F]
-- For a timeline including bond roadshows and big debt maturities, double click here [ID:nLDE61F1VJ].
SAVIOURS ON THE HORIZON?
If Greece cannot get out of trouble on its own, the key question for markets will be what level of external support it can get, particularly from the European Union.
Euro membership allowed Greece to borrow more cheaply, with many investors believing in an unspoken "implied guarantee" from the EU and Germany. Now, they want more details.
Greek leaders insist they are not looking for a bail-out but support to help them borrow at a lower cost. EU officials, Germany and France have also denied any bail-out plan but say they will help if needed.
The EU is walking a fine line as it does not want to set a precedent by jumping to the rescue of a member state that has flouted deficit rules but also cannot afford to let a euro zone member sink.
WHAT TO WATCH:
-- Comments from EU policymakers, Germany and France on aid scenarios including a possible rescue fund for euro zone countries [ID:nLDE6270SU].
-- Market reaction. Any EU aid for Greece would support Greek assets but could undermine German bunds.
-- A shift in EU or IMF comments suggesting an IMF deal might be becoming an alternative to an EU bailout. This would support Greek debt prices without undermining German bunds, although analysts say such a move would be seen as a humiliation for the EU.
-- How other weak euro zone members such as Portugal, Spain and Ireland are doing and whether they avoid a spillover from the Greek crisis. Portugal became the latest euro country to announce austerity measures on Monday, in a bid to convince markets it is not the next in line for Greek-style problems [ID:nLDE6270VJ].
(Editing by Robin Pomeroy)
