Factbox: Key political risks to watch in Greece

By Ingrid Melander

ATHENS (BestGrowthStock) – Doubts over aid for Greece have thrown the debt-choked country much deeper into turmoil, and the crisis that is shaking markets worldwide is unlikely to halt its downward spiral at least until emergency cash arrives in Athens.

Greek debt is now the world’s most costly to insure, and investors have also started pounding other peripheral euro zone countries on fears of contagion.

The next few days will be crucial. How fast a deal on the 40-45 billion euros aid package on offer from euro zone states and the International Monetary Fund can be reached and what conditionsare attached will be key to avoid a default when 8.5 billion euros in debt mature on May 19.

Investors are also worried Greece may need to restructure its debt in any case and doubt whether it can meet its deficit cutting targets as it faces a bleak economic outlook.

Following are key risks:

* UNCERTAINTY OVER THE AID

Greece has entered a spiral of higher debt costs and credit rating downgrades since revealing in October its budget deficit was double previous estimates. None of the successive steps Greece and its EU partners have taken has convinced investors.

Economists say doubts over the aid package because of resistance from Germany mean markets will keep selling Greek assets until the aid materializes — and the package promised so far might not be enough.

The crisis sent the euro to a one-year low against the dollar at one point on Wednesday. The risk premium on Greek government bonds has climbed to new peaks almost every day, making it impossible for the country to borrow on markets.

WHAT TO WATCH:

– EU/IMF talks: Greece hopes talks with European and IMF officials on conditions of the aid package will end by Sunday, in time to receive the aid before the May 19 bond maturity hump.

The EU and IMF want details on austerity measures. Possible hurdles are Athens’ resistance to raising the retirement age, reducing private sector pay, and public sector job cuts. Sources in the Spanish EU presidency have said EU leaders may hold a special summit on May 10 to activate the aid package.

– Germany: Europe’s largest economy holds the key to delivering the aid package and how its position evolves in the coming days will be crucial. Policymakers there are playing hard ball and insist Greece must cut its deficit more to get the aid.

Public opposition to helping a repeat fiscal offender is high ahead of a May 9 election and Berlin is not inclined to soften its stance before then. Germany also wants to defend the euro, however, and Finance Minister Wolfgang Schaeuble has said it could push a law approving the aid by May 7.

How soon Greece gets the money also depends on legal procedures in each of the 14 other euro zone countries and on the IMF [ID:nLDE63P17G]

– Spill-over: Policymakers insist contagion risks are unfounded, but uncertainty over the aid deal has driven bond yields in euro zone peripheral states higher, with Spain and Portugal particularly hard hit.

* DEFAULT, RESTRUCTURING?

Greek five-year credit default swaps (CDS) rose on Wednesday to a record high 911.6 basis points. That means the market is assigning an implied default rate of 52.6 percent to Greek debt, surpassing Venezuela which was until now the highest of all the sovereigns tracked by CMA Datavision.

Markets are increasingly worried about the risk of restructuring or default, pressuring banks and insurers exposed to Greek sovereign debt.

The budget spokesman for Merkel’s Christian Democrats (CDU) said on Tuesday the party would raise the issue of forcing investors to take a discount on Greece debt in talks with the IMF and ECB, but the European Commission said the topic would not be discussed in the talks.

S&P expects an average recovery of between 30 and 50 percent for bond holders in the event of a Greek restructuring or default.

“The chances of a default by the Greek government are increasing not by the day but by the hour. If the IMF and European governments don’t come up with something quickly, then I see the market going down further quite rapidly,” said Koen De Leus, an economist at KBC Securities.

WHAT TO WATCH:

– Market developments, including whether investors continue to increase bets that Greece will have to restructure its debt or face a default in the medium to longer term.

– Comments by German and other EU policymakers on the issue and on the prospect of Greece getting more aid once initial pledges run out to help it avoid a default in the longer term.

* RECESSION

Germany and other EU partners want Greece to commit to tougher austerity steps but analysts warn that pushing belt-tightening too far will deepen the country’s recession, making deficit-cutting targets impossible to hit.

Unemployment jumped to a six-year high of 11.3 percent in January, and the central bank sees the economic contraction at 2 percent. Pressured by high borrowing costs and their exposure to Greek government bonds, banks have seen their shares drop by some 30 percent so far this year.

International Monetary Fund chief Dominique Strauss-Kahn has said deflation is the only way Greece can effectively tackle its debt problems.

WHAT TO WATCH

– Key economic indicators. February retail sales data is due on April 30, April inflation on May 7, the first quarter GDP flash estimate on May 12, February unemployment on May 13 and the March current account balance on May 25.

– To what extent the recession, through lower tax revenues and increasing jobless compensation costs, impacts government revenues and deficit-cutting targets. The Greek government publishes central government revenue figures at the start of each month. They make up for the bulk of general government revenues, which is the data measured under EU rules.

* SOCIAL UNREST

Unions have vowed more strikes and protests as polls show a fall in the socialist cabinet’s popularity.

A survey this week showed 60.9 percent disapproved of the government deciding to ask for the aid. Only 31.9 percent thought the government should stay in power to solve the crisis, and two thirds said the situation could lead to social unrest.

Analysts warn anger is building in a country prone to violent protests and the situation could explode later in the year if the government agrees to more austerity measures to get the EU/IMF aid or if it fails to address anger among most Greeks who want to see big tax evaders and corrupt officials punished.

Public and private sector workers will strike on May 5 and have said they will step up labor action.

WHAT TO WATCH

– Will the government bow to domestic pressure if discontent rises or turns violent and ease off on austerity? Riots paralyzed Athens for weeks in 2008.

– Opinion polls: Will they turn against Papandreou, who still has just over 50 percent support in polls despite widespread disapproval of his policies?

– Strikes and protests: Regular strikes and protests will continue until the summer holidays but all eyes will be on the period afterwards, when austerity measures start biting harder.

* MEDIUM, LONG-TERM RISKS

Markets are nervous because there is no clarity for 2011 and the following years. The Greek budget consolidation plan for those years is still vague and the EU and the IMF have not said if they can give aid then or how much.

Uncertainty is stoking fears that this year’s crisis could repeat itself next year, with Greece again nearing bankruptcy and recession complicating its deficit-cutting targets.

Calculations with a spreadsheet model show the extent of Greece’s challenge. (click on http://r.reuters.com/ved67j)

WHAT TO WATCH:

– What specific measures Greece agrees with the EU and the IMF for 2011-2013, how quickly they are passed into law, and if they satisfy markets and look to guarantee targets to slash the budget deficit to below 3 percent of GDP by 2012.

– Comments from policymakers or any commitments on what further aid could come in the following years if Greece still needs help when this aid package runs out.

Investing Basics

(Editing by Sonya Hepinstall)

Factbox: Key political risks to watch in Greece