By Dina Kyriakidou and George Georgiopoulos
ATHENS (Reuters) - Greece unveiled a three-year plan to slash its budget deficit on Thursday but financial markets remained sceptical it can deliver on the cuts and put a swift end to a fiscal crisis.
Under pressure by EU peers to reduce a huge debt that has prompted some economists to question its euro zone membership, the government said it would aim to cut its budget gap to 2.8 percent of GDP in 2012 from 12.7 percent.
"The efforts in the next three years will be decisive for the country's course," Prime Minister George Papandreou told the cabinet a day before submitting the plan to the EU. "The targets are achievable, we can do it."
The country's fiscal ills have prompted downgrades of its credit rating and a sharp rise in how much it costs it to borrow. Markets continued to punish Athens on Thursday.
Yield spreads between Greek bonds and German bunds widened to 270 basis points, up about 10 basis points from the previous day, during the televised cabinet meeting. The cost of securing Greek debt also hit a new high.
Doubts centred around the plan's forecasts for growth over the next two years, as well as the government's will to take unpopular policy steps.
"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 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."
For Greek bond spread over bunds vs the Euro average, see: http://graphics.thomsonreuters.com/0110/GR_BNDSP0110.gif
AMBITIOUS GROWTH TARGETS
Polls show the public would support tough measures provided the pain was distributed evenly but there are signs of public unrest, with unions calling for strikes starting on February 10.
Officials from the EU, which has hit out at Athens for past inaccuracies in its statistics, visited last week to examine the plan. Brussels has asked Athens for more quantified measures and to focus more on structural cuts rather than one-off taxes.
"The televised intervention (to present the stability plan) is important, it tells a lot about the government's attitude," BNP's Speranza said. "It is positive, very transparent. This is a change compared to the past."
Finance Minister George Papaconstantinou told the cabinet meeting the deficit will be cut by 4 percentage points this year, from 12.7 to 8.7 percent of GDP, with the economy returning to solid economic growth soon.
"In 2011 it will be cut further by 3 percentage points to 5.6 percent of GDP. In 2012, by 2.8 percentage points, falling to 2.8 percent of GDP."
He predicted 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 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.
"The deficit is unlikely to fall as sharply as they think. But if the government tries to meet its goals at all costs that could prompt a very deep and serious recession ... It's clearly a very nasty situation," said Ben May of Capital Economics.
"The growth forecast looks pretty optimistic. We think there is a very strong chance the dowturn will intensify this year. We think that the economy might contract by 2 percent this year and contract again in 2011."
Papaconstantinou also said Greece's ballooning debt will start declining in 2012 and will be at 113.4 percent of GDP in 2013. Greece is expected to tap bond markets later this month.
He 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 servant earning over 2,000 euros a month.
Papaconstantinou reiterated that he expected the EU to approve the plan.
"It is not useful to have ... bond spreads as a guide to economic policy," he told a news conference.
(Additional reporting by Harry Papachristou, Ingrid Melander and Renee Maltezou; Writing by Dina Kyriakidou; Editing by Patrick Graham)