By Lefteris Papadimas and Karolina Tagaris
ATHENS (Reuters) - Greece will emerge from six years of recession next year, a draft budget forecast on Monday, signalling the country is past the worst of a crippling debt crisis that nearly broke Europe's single currency.
Twice bailed-out Athens also confirmed it would post a budget surplus before interest payments this year for the first time in over a decade, and its battered economy won a vote of confidence from billionaire U.S. investor John Paulson.
The positive outlook marks a sharp reversal in fortunes for a nation that had become Europe's problem child, lurching from one crisis to the next as it tottered close to bankruptcy and exasperated its international partners with broken promises.
Analysts cautioned that despite the signs of economic stabilisation, Greece remained hooked on aid and that further debt relief was inevitable to bring down a level of indebtedness set to top 175 percent of gross domestic product this year.
"The key thing is that while things are improving they're doing so from a very low level in Greece. Greece still needs financial assistance from outside," said Ben May, economist at London-based Capital Economics.
"Certainly there are signs that the worst of the crisis may well be over in the euro zone in the short term but you could easily see concerns flaring up longer term."
The Greek economy, which has shrunk by about a quarter since its peak in 2007 and thrown more than one in four out of work, will grow by a modest 0.6 percent next year thanks to a rebound in investment and exports including tourism, the budget predicted.
In a further boost, Athens forecast a primary budget surplus of 1.6 percent of national output next year after posting a small surplus of 340 million euros this year.
Attaining a primary surplus - which excludes debt servicing costs - makes Athens eligible for further debt relief from its European Union and International Monetary Fund lenders.
"In the last three years Greece found itself in a painful recession with an unprecedented level of unemployment," Deputy Finance Minister Christos Staikouras said as he unveiled the 2014 budget. "Since this year, the sacrifices have begun to yield fruit, giving the first signs of an exit from the crisis."
Athens will ask its creditors to honour their commitment to provide debt relief, and hopes it can return to the bond markets in the second half of next year, Staikouras said.
Greece is hoping for an extension of maturities and lower interest rates on bailout loans after its partners ruled out an outright write-off of debt. It also expects to receive a third bailout of about 10 billion euros to get through next year.
As a way to achieve debt relief once it attains a primary budget surplus this year, Greece is looking into swapping a big chunk of its bailout loans with a 50-year government bond, an official close to the discussions has told Reuters.
"I hope this materialises and we convert our debt into long-term debt with low interest rates," Finance Minister Yannis Stournaras told a TV talk show early on Tuesday. "I hope so."
On the streets of the capital, Greeks worn down by years of rising taxes and shrinking wages were sceptical about any upturn. Few shared their government's optimism that the country was finally turning the corner.
"I don't believe them. Whatever they've told us has been wrong," said Yorgos Dedousis, 55, a newspaper vendor on Syntagma square outside parliament.
"Every day people walk past here and tell me 'I'm hungry, I'm hungry.' What's changed? As long as we're under the bailout, we're going to have problems."
After a debt-fuelled boom in the years following its entry into the euro zone, Greece's descent into financial chaos began in 2008 when it plunged into recession amid a global financial crisis.
Repeated rounds of spending cuts imposed at the behest of the EU and IMF exacerbated the recession and stirred up public anger against austerity. The economy is expected to contract by 4 percent this year, with the jobless rate peaking at 27 percent. Nearly 60 percent of young people are out of a job.
Excluded from financial markets since 2010, Greece has been kept afloat solely by 240 billion euros in aid from the EU and IMF. It nearly crashed out of the euro zone and dragged down the global economy along with it last year before returning to a more stable financial footing over the past year.
The 2014 draft budget targets a general government deficit of 2.4 percent of gross domestic product next year, with unemployment dipping slightly to 26 percent. Debt is also expected to fall slightly to 174.5 percent of GDP next year.
U.S. hedge fund group Paulson & Co said it expected the protracted recession to bottom out this year, making Greece's recapitalised banking sector an attractive investment play on the country's recovery after a deep six-year slump.
(Additional reporting by Harry Papachristou, George Georgiopoulos and Tatiana Fragou; Writing by Deepa Babington; Editing by Giles Elgood and Mohammad Zargham)