By Dina Kyriakidou and Ingrid Melander
ATHENS, Sept 4 (Reuters) - One of the euro zone's weakest links, Greece is seen sliding into recession this year, while an Oct. 4 snap parliamentary election raises the risk of a long period of political uncertainty.
Here are some of the risks Greece faces:
Opinion polls show no party will win outright the Oct. 4 election, called by Prime Minister Costas Karamanlis this week [ID:nL4523634].
Investors and rating agencies will be watching the new government's policies, saying debt-ridden Greece needs a strong government to push through long-delayed reforms.
The prospect of an inconclusive vote sent jitters through markets this week, with Greek stock prices .ATG falling on Thursday, followed by a six-week high on Friday on the premium investors demand to hold 10-year Greek bonds rather than benchmark German Bunds.
The cost of insuring Greece's sovereign debt in the credit default swaps market increased by 2.5 percent on Friday, according to market monitor CMA Datavision, the biggest shift among countries they tracked.
A repeat vote or, less likely, a coalition, would follow if there is no clear winner.
Greece has the euro zone's second biggest debt as a percentage of GDP, seen at 103.4 percent in 2009.
Yield spreads over German bunds hit a record high in February, as risk averse investors fled the euro area's periphery amid the crisis. Although spreads have returned to more normal levels, Greece's ballooning debt remains the economy's most serious risk.
Rating agencies Fitch and Moody's have downgraded their outlook on Greek government bond ratings, citing concerns over the impact of the economic downturn on public finances. Standard & Poor's cut Greece's rating to A- in January.
Most analysts expect the European Union to provide financial support for Greece, stemming any default risk. But worries over the cost of supporting the euro zone's most indebted economies, Greece and Ireland, is seen as a potential risk for the euro and the sovereign debt of Germany, which would foot the bill.
SLOW REFORMS, PRIVATISATIONS
Facing street protests and even resistance within its own ranks, the government has been slow to implement structural reforms needed for long-term growth.
In 2008, an overhaul of the social security system, which experts warned would collapse in 15 years due to an ageing population, fell short of what was necessary. Education reform, seen as crucial to making the labour market more competitive, had a similar fate amid violent protests.
Greece faces the risk of extended slow growth if it fails to adopt structural measures to boost competitiveness and correct its fiscal imbalances, the EU and the IMF have said.
The government was more successful with privatisations. It sold a stake in telecom OTE (OTEr.AT) to Deutsche Telekom (DT) (DTEGn.DE) and privatised Olympic Airlines.
Greece's 250-billion-euro economy, which makes up about 2.5 percent of the euro zone, is seen sliding into recession this year, for the first time since 1993.
Tourism and shipping remain Greece's main economic pillars, making it particularly vulnerable to the global downturn. Although shipping has shown signs of recovery, tourism has been especially hurt this year.
Greek banks, although largely safe from the toxic assets that have brought down global giants, are heavily invested in the Balkans and have seen their profit growth wane as the once booming economies of eastern Europe slow down.
Standard & Poor's views Greece's banks as facing the highest long-term economic risks in Western Europe.
After Greece's worst riots in decades in December 2008, violence has simmered, including some bomb attacks by leftist and anarchist groups. The riots were triggered by the police killing of a teenager and were fanned by high youth unemployment and mistrust in the political system.
Far-left and anarchist groups have capitalised on the climate of unrest to renew attacks on businesses and police. A policeman was killed in June, and a car bomb blew up outside the Athens stock exchange on Wednesday. (Additional reporting by Renee Maltezou, Editing by Janet Lawrence)