Greece lays out deficit cuts

Under pressure by EU peers to shore up derailed finances which have thrown Greek markets into turmoil, the government said it would aim to cut its budget gap to 2.8 percent of GDP in 2012 from 12.7 percent last year.

We will achieve fiscal consolidation within three years, we will do everything it takes for this, Prime Minister George Papandreou told the cabinet a day before submitting the plan to the EU. We can do it, this target is feasible.

The country's fiscal ills have prompted credit rating downgrades and a sharp rise in borrowing costs.

Markets continued to punish Athens on Thursday, as analysts said the plan lacked details they have been calling for months on how the deficit cuts will be achieved, questioning its implementation as well as its growth forecasts.

Yield spreads between Greek bonds and German bunds widened during the televised cabinet meeting and later jumped to an 11-months high after ECB President Jean-Claude Trichet took a tough line on troubled member nations.

The cost of securing Greek debt hit a record high.

CREDIBILITY GAP

The plan laid out previous promises to cut welfare spending, reform taxation and save on public sector wages. Both the EU and economists have said they do not look enough in real terms and that Greece should emulate Ireland's more drastic measures.The proof in the pudding may be whether Athens follows up with policies that convince economists and the EU it can meet the targets. The reaction of unions will be key in a country where reforms have often stumbled on street protests.

Greece has a problem of credibility in terms of implementation of the plans. We have a history of very ambitious plans not implemented, said BNP Paribas analyst Luigi Speranza.

If you take into account there will be a 10 percent adjustment in the public deficit this (growth forecast) is quite ambitious. One of the two will not be achieved, either growth or the deficit. Together it's a really hard task.

The public sector union ADEDY said on Thursday it would go ahead with a planned strike against austerity measures February10, saying that the measures would only hurt the poor.

But polls show the public would support tough measures provided they were fair.

Although there is some grumbling about policies ... the government could move faster and take some tough measures because it looks like society will accept them, said pollster Costas Panagopoulos. The prime minister has a good image.

EURO EXIT ABSURD

Economic analysts polled by Reuters said there was only a 20 percent chance Greece would need a bailout but most agreed its overall credit rating would fall below A by the end of 2010..

A Standard & Poor's official added that Greece's credit rating would fall to junk status if it left the euro zone.Athens has consistently rejected that idea and European Central Bank President Jean-Claude Trichet called it an absurd hypothesis on Thursday. But he also said that Greece had much to do and warned that the ECB would not change its rules on collateral bonds to help Greece.

Another issue is the credibility of Greece's data, which the EU has questioned numerous times in recent years. An EU draft showed on Thursday that finance ministers will urge Athens next week to fix its statistics as a priority.

Finance Minister George Papaconstantinou said the deficit will be cut by 4 percentage points this year, to 8.7 percent of GDP. It would fall by a further 3 percentage points to 5.6 percent in 2011. But that was all dependent on a return to growth which most analysts said looked tenuous.

Papaconstantinou said Greece's economy would expand in 2011, after falling into its first recession in 16 years in 2009, and grow by 1.9 percent in 2012 and by 2.5 percent in 2013.

The growth forecast looks pretty optimistic, said Ben May of Capital Economics. There is a very strong chance the downturn will intensify this year.

The plan projected unemployment at 9.9 percent this year, rising further to 10.5 percent in 2011 and 2012. It promised to start generating primary surpluses from 2011, and laid out a 13 billion fall in borrowing this year, to 53.3 billion euros (47.3 billion pounds).

Papaconstantinou has said deficit cutting measures will include less defence and hospital spending, a reduction of overtime and supplemental or bonus pay in the state sector and a pay freeze to public servants earning over 2,000 euros a month.

(Additional reporting by Harry Papachristou, Ingrid Melander, George Georgiopoulos and Renee Maltezou; Writing by Ingrid Melander; Editing by Toby Chopra)