* Euler Hermes says won't underwrite new Greek business
* Trade insurers await outcome of June 17 Greek election
* Insurers trim coverage for Italy, Spain -broker
By Myles Neligan and Jonathan Gould
FRANKFURT/LONDON, May 30 (Reuters) - The world's biggest trade credit insurer, Euler Hermes, has suspended cover for exporters shipping to Greece because of the mounting risk they would not be paid if the debt-laden nation were forced out of the euro.
"Euler Hermes has decided no longer to cover deliveries to Greece for the foreseeable future," a Euler Hermes spokesman told Reuters on Wednesday.
Existing contracts will be honoured, but Euler Hermes will not underwrite any new Greek business, the spokesman said, adding that the insurer would reconsider "as soon as the situation improves".
Coface, the number three player in the trade credit insurance business, has also suspended coverage for exporters shipping to Greece, the Financial Times newspaper reported on Wednesday.
Coface was not immediately contactable late on Wednesday.
A Greek exit from the euro zone would force companies there to revert to the drachma, which would likely fall sharply against the single currency to reflect Greece's fiscal crisis.
That would restrict Greek importers' ability to pay euro-denominated invoices, potentially inflicting big losses on European suppliers that would be recoverable from their trade credit insurers.
Euler Hermes had warned last week that it might restrict cover for Greece-bound exports.
Trade insurers have been reviewing their Greek exposure ahead of the country's June 17 general election, seen as a potential trigger for a euro exit if victory goes to parties that oppose spending cuts agreed under a European bailout deal.
"It's a watershed - everyone's watching what happens and trying to make contingency plans," said Richard Talboys, head of political and trade credit risk at insurance broker Willis.
"There are smoke and flames coming out of Greece but we don't know if it can be put out, or if the Greeks will pour oil on it by voting against restructuring and austerity."
Reduced availability of insurance cover for exports to Greece will likely make it harder for manufacturers there to source imported components and materials, said Vincent McCue, trade credit client team leader at insurance broker Marsh.
"The trade credit insurers are saying if, as a result of the election, a government comes to power that is committed to overturning the austerity package, even the very best of companies in Greece will no longer be able to pay their debts as they fall due," he said.
The industry has also been gradually trimming its exposure to Spain and Italy, heavily indebted and mired in recession, though not immediately at risk of quitting the euro, McCue added.
Trade credit insurers were criticised during the 2008 crisis for abruptly withdrawing cover, disrupting supply chains and forcing several European governments to plug the gap with state-backed insurance schemes.
They have since tried to build up better data on their customers' trade partners to gauge the risk of non-payment more accurately and avoid the need for rapid adjustment during economic or financial market crises.
German exporters' association BGA said reduced availability of insurance for Greece from the private sector was fuelling fresh demand for government-backed programmes.
"We see a clear need for continued credit insurance cover for Greece, and that need is not being sufficiently covered by private sector insurance for the time being," said Gregor Wolf, BGA's head of foreign trade.
"In extreme cases, like for example Greece, we are thankful that governments can quickly jump in."
Germany this month reactivated a state trade credit insurance scheme after the European Commission gave European governments the green light to do so in April, Wolf said.
Euler Hermes, majority-owned by German insurer Allianz , insured transactions worth 702 billion euros ($880.03 billion) last year. The company's operating assumption is that Greece will stay in the eurozone, its spokesman said.
Most European export transactions are uninsured. About 15 percent of British exporters buy trade credit insurance, compared with about 25 percent in export-focused Germany, according to informal estimates from industry sources.
Greece imported 45.6 billion euros' worth of goods last year, more than double the 20.2 billion it exported, according to International Monetary Fund figures.
Germany accounted for 5.1 billion euros of Greece's imports in 2011, down 14 percent from the previous year, according to BGA figures.
No one at Atradius, the second-biggest trade credit insurer, was immediately available for comment. The company said last week it was still underwriting Greek business on a "very selective" basis.