The European Union should be more specific on how it would support Greece in a crisis, to help lower the highly indebted country's borrowing costs now, Greek Finance Minister George Papaconstantinou said on Thursday.

Concern over Athens' ability to repay its debt mountain has shaken confidence in the euro and prompted EU leaders to issue a vague pledge that they would take coordinated action, if needed, to preserve the stability of the single currency.

In an interview with Reuters, Papaconstantinou said while Greece respected the euro zone's principle of dealing with fiscal problems by itself, it did not rule out seeking International Monetary Fund assistance, although it was not actively pursuing that option.

If the EU gave a clearer indication of the mechanism that might be used, in an emergency, to help Greece, bond spreads would fall and a rescue would not be needed, Papaconstantinou said.

I'm not asking people to say exactly what is going to happen but we need to give the assurance to markets that we are actually working toward a potential instrument ... so that we will never have to use it, he said.

EU leaders expressed political support for Greece last week but fell short of spelling out a bailout scenario.

Bond markets were probing to see whether there was a genuine backstop for Greece because that statement was short on specifics, given the reluctance of a number of countries to go further.

The best deterrent is the one that you put on the table for everyone to see and you never have to use it. That's what the markets are looking for, the minister said.

BILLIONS TO BORROW

Greece needs to borrow or refinance 53 billion euros ($71.84 billion) this year, more than 20 billion of it in April and May. Investors are charging a risk premium of about 330 basis points to buy Greek 10-year debt rather than benchmark German bonds.

The country has taken a beating in markets since a new Socialist government revealed in October the 2009 budget deficit would hit 12.7 percent of gross domestic product, three times the EU limit and twice as big as previously expected.

The government vowed to cut the gap to 3 percent of GDP by 2012 with tough steps, such as freezing public sector salaries and hiking taxes. Despite labor union strikes, opinion polls show most Greeks support the measures provided they are fair.

Papaconstantinou said he was aware EU partners wanted Greece to take extra austerity measures and he would discuss this with visiting Commission officials later this month.

He would not say what additional measures -- ranging from cutting the public sector wage bill to more taxes -- he might take but did not rule out increasing Value Added Tax, now at 19 percent on most products and services.

We are looking at all options, he said.

One percentage point of VAT would bring in roughly 1 billion euros in extra revenue.

Papaconstantinou said lowering borrowing costs would help him meet a commitment to the EU to reduce the budget deficit by 4 percentage points of GDP this year.

If you have a clear (EU) statement of intent, then my spreads will collapse with a week, and therefore my assumptions within the programme will turn out to be right.

Rating agencies, which have downgraded Greece in recent months, say the deficit cutting goals are based on over-optimistic GDP assumptions. The economy shrank by 2 percent last year, worse than the 1.2 percent contraction expected.

Officials had said the economy was expected to return to growth in the second half but the prospects look dim after last year's GDP figures. Papaconstantinou said Greece was already prepared for a worse than expected outcome this year.

We are looking at how to take account of potential risks materializing ... that's why we've created the contingency reserve, which is 1.2 percent of GDP, he said.

The minister said Greece would decide its next bond issuance soon. Officials have said the government would opt for a 10-year bond by the end of February, seeking to raise up to five 5 billion euros, but he would not confirm the details.

We'll look how it develops in the next days and weeks and then we'll make a decision, he said.

The minister said he was confident Greece would resolve its debt crisis within the EU family but could not completely rule out going to the IMF.

You cannot completely dismiss the idea of the IMF, he said. We are dismissing it at the moment because it's not within the euro zone rules but obviously it is a possibility which is out there.

(Editing by Ron Askew)

International Monetary Fund