By Dina Kyriakidou and Lefteris Papadimas
ATHENS (Reuters) - Greece's launched an ambitious three-year plan to slash its budget deficit on Thursday but did little to convince financial markets it can deliver on the cuts and put a swift end to its fiscal crisis.
Under pressure by EU peers to reduce a huge debt that has even 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 last year.
"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.
Analysts questioned the plan's growth forecasts over the next two years, as well as the government's will to take unpopular policy steps, and said it lacked detail.
The plan laid out existing promises to cut welfare spending, reform taxation and save on public sector wages. Both the EU and economists have said this does look like enough in real terms and that Greece should emulate Ireland's more drastic measures.
"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."
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 hypothesy" on Thursday.
The proof in the pudding may be whether Athens follows up the plan with policy proposals that convince economists and the EU it can meet the targets.
Analysts say the government has the support to be brave in implementing harsher measures. Although unions have called anti-austerity strikes starting on February 10, 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."
The other issue is the credibility of Greece's data, which the EU's statistics body Eurostat has questioned numerous times in recent years.
An EU draft obtained by Reuters on Thursday showed finance ministers will urge Athens next week to fix its statistics as a priority and ask the bloc's executive to develop an action plan on the issue by February.
AMBITIOUS GOALS
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.
"The growth forecast looks pretty optimistic," said Ben May of Capital Economics. "There is a very strong chance the downturn will intensify this year."
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.
It 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.
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 Dina Kyriakidou; Editing by Patrick Graham)
