By Ingrid Melander and Harry Papachristou
ATHENS (Reuters) - Markets pounded Greek bonds and banking stocks on Thursday, driving the debt-stricken euro zone member's borrowing costs to new highs and pushing it closer to tapping a last resort EU/IMF safety net.
The government struggled to reassure markets it can stay solvent after the premium investors demand to buy Greek rather than the benchmark German government debt surged for the third day in a row to a record high since Greece joined the euro.
But skepticism at a dearth of details surrounding the European Union and International Monetary Fund lifeline continued to pile pressure on a country already struggling to cover its wide fiscal gap and huge public debt load.
Chris Pryce, senior Greece analyst for rating agency Fitch, said Athens' only choice now was to ask for help.
"Despite everything the EU and the euro zone have done there is still a lack of clarity (and) confusion about what they intend to do, when they intend do it and how much would be involved," he told Reuters.
"It is now up to the Greek government to go publicly to the EU and IMF and ask for the cash and the support."
Greece's government has pledged to cut its public finance deficit by almost one third to 8.7 percent of gross domestic product this year, but is also wary of sparking public unrest after a string of riots and strikes since last year.
Reluctant to give in to the pressures, Greece insists it prefers to borrow from markets and will use the European Union/International Monetary Fund safety net agreed only as a last resort, a call it repeated on Thursday.
"For the time being it is not necessary to activate the aid mechanism. The EU/IMF safety net is there to guarantee that Greece is not alone," said spokesman George Petalotis, adding Athens was striving not to borrow at "barbaric" interest rates.
But the 10-year Greek/German government yield spread
spiked almost half a percentage point to as much as 463 basis points on Thursday.
Two-year Greek government bond yields surged more than 100 bps to almost 8 percent.
"INSANE" LEVELS
"Spread levels today are insane, they are not levels for a euro zone country," said Panagiotis Dimitropoulos, treasurer at Millennium Bank in Greece. "It seems Greece is being pushed toward the aid mechanism."
Germany, which can veto Athens' access to the aid package, also held firm on its position that it is only a last ditch option, with a spokesman saying that, despite the jump in borrowing costs, "the government's position remains unchanged."
Dealing with its own financial problems as a local election looms, Berlin has been loath to set a bad example for other euro zone offenders by letting Greece off the hook too lightly.
Greece's woes drove the euro close to its 2009 low against the dollar on Thursday. It slipped 0.2 percent to $1.3306 at 1227 GMT, just off its 2010 low of $1.3267.
The next main challenge Greece faces is to borrow 11 billion euros by the end of May.
Three bonds worth 18 billion euros have performed badly this year in the secondary market, and analysts say a dollar bond planned for April and May would struggle to draw demand at yields seen attractive by the government.
Banks, which have asked to tap 17 billion euros remaining in a crisis support package, saw shares tumble more than 7 percent.
They are down 50 percent since worries over how Greece will cut a debt pile that exceeds its annual economic output by a fifth started to rattle investors in mid-October, wiping out about 24 billion euros ($32 billion) in market capitalization.
BANKS HIT
A banking source who wished not to be named said the country's four largest banks -- National Bank of Greece, Eurobank, Alpha Bank, and Piraeus Bank -- had asked to access the support package's remaining funds last week.
They have been hit by worsening portfolio performance due to the deterioration of the state bonds which the banks hold and a rise in non-performing loans, and media have reported foreign banks have stopped taking part in interbank activity, squeezing banks' ability to roll over short-term loans.
Another issue is new rules being announced on Thursday from the European Central Bank on extending easier lending terms for holders of Greek government bonds into 2011.
The rules will defuse the danger of Greek debt falling off the list of what banks can swap for ECB loans next year if it faces more ratings downgrades.
But they also introduce a sliding risk premium scale, or "haircuts" on bonds that are used widely by Greek banks to tap ECB credit. That could create funding problems for them by effectively cutting the value of assets that do not enjoy the highest ratings.
(Reporting by Lefteris Papadimas and Ingrid Melander; writing by Michael Winfrey; Editing by Ruth Pitchford)
($1=.7511 euros)
