By Lefteris Papadimas and Dina Kyriakidou
ATHENS (Reuters) - Greece will bring forward painful budget cuts to end a decade of primary deficits while grappling with a sixth year of recession, according to a 2013 budget draft aimed at satisfying international lenders.
The government will unveil a tough austerity budget later on Monday, after Finance Minister Yannis Stournaras concludes a meeting with the so-called "troika" of International Monetary Fund, European Commission and European Central Bank inspectors for any last-minute tweaks.
Government officials told Reuters Greece will aim for a primary surplus before debt servicing of 1.1 percent of GDP next year, from a 1.5 percent deficit in 2012, the first positive balance since 2002. But the economy will continue to shrink for a sixth year in 2013 by 3.8 to 4 percent.
Greece's economic output will have declined by a quarter since 2008 in a vicious spiral of austerity and recession, with the most heavily indebted euro zone nation repeatedly falling behind in meeting targets set under its EU/IMF bailouts and at risk of being forced out of the single currency area.
Analysts said even the recession scenario set out in the budget appeared optimistic, given Greece's slow reform efforts and a weakening euro zone economy.
"Chances are the budget targets will be missed because of the deeper recession which the cuts will bring and the inability to meet privatization targets," said Xenofon Damalas, head of investment services at Marfin Egnatia Bank.
PAINFUL CUTS
The budget draft will include more cuts in public sector pay, pensions and welfare benefits as part of an 11.5 billion euro ($14.8 billion) austerity package of savings that will be spread out over the next two years.
Austerity-weary Greeks have taken to the streets in often violent protests against the waves of salary and pension cuts that have driven many to the edge. Prime Minister Antonis Samaras, who will also meet the troika chiefs later on Monday, has vowed this is the last round of cuts.
Troika officials were jeered by dozens of protesters waving Greek flags and shouting "out with the troika" as they entered the finance ministry on Monday.
At stake is a 31.5 billion euro installment from a 130 billion euro second bailout keeping Greece afloat. Lenders have made clear no money will be disbursed without credible measures.
However two German magazines reported on Saturday that Athens will receive its next aid tranche despite budget shortfalls and slow progress on reforms because the euro zone does not want the country to leave the common currency.
The business weekly Wirtschaftswoche quoted a senior EU official as saying fear of a "domino effect" if Greece is forced to exit the euro zone is too great to contemplate withholding the funds.
Lenders are coming to terms with the fact Greece will need more time, more funding or a restructuring of the official debt, that owed to European governments, to survive. Sources say the IMF prefers another haircut but the EU, which will suffer most of the losses, would rather give Athens more time.
"Those who accept Greece's optimistic predictions want to gain time to resolve the debt crisis overall," Damalas said. "But talk has already begun that the austerity measures are not enough and a new, official haircut will be needed - which explains the tension between the IMF and the EU."
In Germany, the main contributor to euro zone rescue funds, the main opposition challenger for chancellor, Peer Steinbrueck, said on Sunday the Greeks should be given more time and help to meet their reform targets.
However, Slovak Prime Minister Robert Fico predicted in a television interview that the euro zone would not survive in its current form and said Greece and possibly another country would be forced to leave once it became clear they were unable to meet their commitments.
TENSIONS AT HOME
Two junior leftist parties in Samaras's coalition government have resisted the cuts and a handful of deputies have warned they will vote against the bill in parliament, which will debate the draft and vote on the final version in mid-December.
"We are trying to rescue whatever we can even at the eleventh hour," Andreas Papadopoulos, spokesman for the small, co-ruling Democratic Left party, told Reuters, signaling the battle in parliament will be intense.
Analysts expect the coalition, which holds 178 out of 300 parliament seats, to pass the bill despite any defections. The final budget is expected to differ from the draft.
A government official, who spoke to Reuters on condition of anonymity, said Athens will frontload a big chunk of the new spending cuts under negotiation with the troika.
"The draft budget will include 7.8 billion euros in cuts for 2013," the official said.
Belt-tightening has taken a toll on economic activity, suppressing domestic demand and driving the jobless rate to a record of almost 25 percent.
This year's primary deficit - which excludes debt servicing costs - is expected to exceed a targeted 1.0 percent of GDP. The finance ministry sees the primary deficit at 1.5 percent of national output in 2012.
Returning to a primary surplus will hinge on how faithfully the government sticks to the unpopular measures, after years of missed targets that have angered its partners.
"In terms of the government meeting the targets, it will be very difficult," said Ben May, European economist at London-based firm Capital Economics, adding that tensions within the coalition could derail efforts especially if the troika asks for additional measures down the road.
"We are at the stage where all the easy options have disappeared," he said. ($1 = 0.7773 euros)
(Additional reporting by Karolina Tagaris and Renee Maltezou; Writing by Dina Kyriakidou; Editing by Paul Taylor)
