* Greek steps may pave way for EU aid to Greece
* Concern over Greece's ability to meet targets will persist
* EU aid would not resolve long-term problems
* Markets have probably already mostly factored in aid
By Andrew Torchia
LONDON, March 3 (Reuters) - Austerity steps announced by Greece on Wednesday may pave the way for European Union government aid, easing fears that Greece could lose its ability to borrow from debt markets at affordable rates. [ID:nLDE6221AG]
But market worries about Greece are likely to remain acute for the foreseeable future, and doubts will remain over its ability to hit fiscal targets amid a deep recession.
Confidence in the euro currency
PROSPECTS FOR EU AID
Greece's announcement may be a key step towards an informal aid-for-austerity exchange deal with EU governments.
All parties are under growing time pressure to reach a deal on easing the crisis because Greece needs to refinance about 20 billion euros of debt maturing in April and May.
Greek Prime Minister George Papandreou will meet German Chancellor Angela Merkel in Berlin on Friday, and visit French President Nicolas Sarkozy in Paris on Sunday.
A German government spokesman said on Wednesday that Berlin would not offer any assistance to Greece on Friday, and German public opinion has strongly opposed aid to Greece.
But editorials in some major German newspapers this week suggested key opinion-makers were shifting towards granting aid in order to avert damage to the euro zone as a whole. Merkel appeared to encourage this shift by saying the euro faced the most difficult time in its 11-year history. [ID:nLDE62117K]
Papandreou has another bargaining chip with the EU: he told his cabinet on Wednesday that he might turn to the International Monetary Fund if the EU did not give support, a government source said. For the EU, this would be an embarrassing admission that the bloc could not solve its own problems. [ID:nATH005248]
SHAPE OF ANY EU AID
Although the EU treaty seeks to prevent bailouts of member states, legal issues could be overcome with enough political will. [DL:nLDE6190HW]
EU governments could offer many forms of aid, from speeding disbursement of structural economic aid to giving debt guarantees or creating a bailout fund.
Because aid would have to be justified to taxpayers in rich EU states, it is unlikely to involve government-to-government transfers of cash. Instead, it would probably be indirect and designed to help Greece continue to borrow in debt markets.
Sources familiar with governments' deliberations have said, for example, that state-run banks such as Germany's KfW and France's Caisse des Depots might buy Greek bonds or extend guarantees for other banks to do so. [ID:nLDE61R0BX]
German and French media reports have said governments in the 16-country euro zone might offer aid worth a total of 20 to 25 billion euros ($27 billion to $34 billion). Officials have declined to comment on the size of any aid plan.
GREECE'S ABILITY TO IMPLEMENT AUSTERITY
Papandreou seems to face no serious political challenge in pushing through austerity steps; his socialist party has 160 seats in the 300-member parliament and the main conservative opposition has committed itself to austerity in principle. No general election is due until late 2013.
Despite a series of one-day strikes by unions, public opinion polls show strong support for austerity in principle if the pain is distributed equitably. A poll last month showed 76 percent of Greeks thought there should be no strike action until the crisis had passed. [ID:nLDE61L0HK]
But a crumbling of the austerity consensus and the launch of protracted industrial action cannot be ruled out late this year if the economy does not start recovering in the second half as the government has predicted.
The Markit Manufacturing Purchasing Managers' Index for Greece, released this week, suggested the economy was continuing to worsen; the February index hit a 10-month low.[ID:nLAG006140]
GREECE'S ABILITY TO HIT FISCAL TARGETS
By hurting tax revenues and shrinking gross domestic product, the recession may make it even harder for Greece to hit its ambitious fiscal targets - and any EU aid is expected to be conditional on these targets being met.
Athens aims to slash its budget deficit-to-GDP ratio from 12.7 percent last year to 8.7 percent this year, to 5.6 percent in 2011 and below the EU limit of 3 percent in 2012. [ID:nLDE6191EJ]
Even in good economic times, such a fast reduction would be very difficult and has rarely been achieved by other countries, as the Czech finance minister observed last week. [ID:nLDE61N0T2]
MARKET REACTION
Investors have begun to anticipate a Greek austerity announcement and an EU aid package in recent days, so given the continued scepticism over Greece's ability to hit its targets, markets may not rally much further even if EU aid is confirmed.
The spread of the 10-year Greek bond yield
Greek bank shares <.FTATBNK> have rebounded 18 percent since early February but remain about 45 percent below a peak hit in October before the country's crisis erupted. They fell on Wednesday.
EU aid would cut the risk of a run on Greek banks triggered by Athens losing access to the debt markets, but the austerity steps will mean the banks facing a tougher operating environment.
Debt rating agencies are unlikely to rush to upgrade Greece. Pierre Cailleteau, head of global sovereign ratings at Moody's Investors Service, said last month that if in the next couple of months Moody's saw Athens was on track to hit fiscal targets, it might change the negative outlook for Greece's A2 rating to neutral. [ID:nTOE61O07C]
Twenty-seven of 47 economists in a Reuters poll early this week predicted the crisis would continue in a "slow burn" mode, with Greece avoiding default but making only limited progress towards its fiscal targets. [ID:nLDE6210YX]
OUTLOOK FOR EURO ZONE
Should the EU does come to the aid of Greece this year, German taxpayers may become unwilling to provide support over the long term if structural economic weakness keeps Athens dependent on EU aid for years.
And the EU has shown little sign of reforming the way the bloc works to prevent such debt crises occurring with other members in future.
It has said it will tighten monitoring of members, but it still has no guarantee that countries will maintain fiscal discipline or that their economies will be able to work well inside the euro zone's monetary straightjacket.
For these reasons the euro, which has been weak against the dollar since early December partly as a result of the Greek crisis, may not stage a substantial rebound any time soon, and investors may attach a risk premium to it over the long term.
The euro firmed only marginally on Wednesday and remained near nine-month lows.
(editing by John Stonestreet)