by William Ickes

FRANKFURT, GERMANY - Greece faced crunch time Wednesday as markets and anxious eurozone partners demanded a new austerity plan before deciding whether or not Athens deserves another chance to fix its debt crisis.

If Athens cannot borrow the money it needs to cover a massive public deficit and debt, the country could go bankrupt, Prime Minister George Papandreou warned late Tuesday.

That would create a huge headache for its European peers who are scared Greece's problems could thrash the eurozone's credibility.

Greece must avoid "a nightmare of bankruptcy in which the state would not be able to pay salaries or pensions," Papandreou told lawmakers in Athens before adding: "We find ourselves today in a wartime situation."

GFT analyst David Morrison agreed that "the situation is becoming critical - and we are now getting to the stage where the problems cannot be kicked further down the street."

Athens needs more than 20 billion euros (27 billion dollars) by May to cover the financing of a public deficit that is close to 13 percent of gross domestic product (GDP) and it must find the money either on the financial
markets or from its eurozone partners.

A total of 54 billion euros will have to be raised this year to cover the public deficit which has swollen way beyond the three percent EU limit.

To get eurozone support, Greece has had to draft a new series of austerity measures due to be outlined on Wednesday after an early cabinet meeting.

A Greek official told Dow Jones that Athens would issue a 10-year bond to raise between three and five billion euros "within days of the announcement of the austerity package."

The market's reaction to that will tell political leaders whether investors believe Greece is serious about getting its finances in order or not.

Papandreou was to meet on Friday in Berlin with German Chancellor Angela Merkel, who holds the purse strings to any eurozone bailout.

Although European Union leaders have stressed that Athens has "to do its homework," in Merkel's words, analysts believe the 16-nation bloc will work to prevent the crisis from spreading to larger economies, such as Spain and possibly Italy.

"There is clearly a political "game of chicken" being played out between Greece and the EU (Germans)," economist Neil MacKinnon at VTB Capital told AFP in an email.

A rescue "has to be agreed, whether it is some sort of loan package contingent on evidence of Greek budget cuts or debt purchases by EU governments and/or state owned entities or some sort of debt guarantees," he added.

Greece's position has got to the point that Papandreou acknowledged in a BBC interview that "our borrowing needs are covered til mid-March," surprising analysts as much by his candor as the fast-approaching deadline.

Goldman Sachs economist Erik Nielsen wondered whether it was just a "casual and broad observation" by someone unused to dealing with markets or "a new page in a policy of - if so, amazing - transparency."

Greek officials are expected to raise taxes and close tax loopholes, trim public-sector entitlements and pay, and freeze pensions to cut the deficit by four percentage points this year.

MacKinnon highlighted concerns that the government may not make the grade. "I think the Greek budget targets are over-ambitious and are unlikely to be achieved," he said.

There have already been a series of strikes and protests against the government's previous austerity measures and on Tuesday, Greek taxi drivers went on strike, beating civil service unions to the punch.

UniCredit fixed income strategist Giuseppe Maraffino told AFP however that bond markets signalled more confidence in "the plan to save Greece" even though the interest rate, or yield, on 10-year Greek bonds stood at a very high 6.04 percent.

That was almost exactly the same level of 10 years ago, before Greece joined the eurozone and began to benefit from its close association with fiscally disciplined countries such as Germany. --AFP