UPDATE 1-Greek economic woes not due to banks- Greek cenbank

ATHENS, Dec 23 (Reuters) - Banks are not the cause of Greece's economic woes and the biggest challenge for policy makers will be to reverse the negative market sentiment towards the country, its central bank said on Wednesday.

'Reversing the negative sentiment in markets towards Greece is the biggest challenge macroeconomic policy is called to face immediately,' the Bank of Greece said in an interim financial stability report.

Soaring budget deficits and worsening debt dynamics have dealt Greece consecutive downgrades by rating agencies, resulting in higher borrowing costs for the euro zone's most indebted country in 2010.

The Bank of Greece said the Greek economy's ability to keep pace with the incipient global economic recovery, as it takes hold, will depend crucially on the speed with which fiscal imbalances are corrected.

'Success with restoring confidence will also determine the ability of the domestic financial system to maintain in the future the remarkable resilience it exhibited even in the most difficult periods of the global crisis,' the report said.

The Bank of Greece said that unlike what was the case in other countries, 'the causes of the Greek economy's problems do not originate from the banking sector or its linkages with the global financial system.'

It said the key aggregates of the Greece's banking sector remained fundamentally sound and do not pose risks to financial stability.

'In view of the need to deal prudently with the consequences of the economic downturn in Greece and the other countries where they are active, Greek banks should maintain comfortable capital buffers, above the supervisory minimums, by increasing internal financing through retained earnings,' the central bank said.

It said the capital adequacy of Greek banks and their groups at end September 2009 stood at 11.7, up from 9.4 at the end of December 2008.

(Reporting by George Georgiopoulos; Editing by Toby Chopra) Keywords: GREECE CENBANK/ ([e-mail]; [phone]; Reuters Messaging:[e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.