IMF releases new funds for Greece bailout (AFP)

WASHINGTON (AFP) – The International Monetary Fund said it was releasing 3.2 billion euros ($4.6 billion) to Greece but warned there was "no margin for slippage" in the country's reform program.

The funds, part of the 110 billion euro joint bailout with the European Union for the debt-stricken country, came as Europe's leaders and banks struggle to achieve an ostensibly voluntary restructuring of the country's debt to relieve pressure on Athens and avert a forced default.

The IMF said Greece was making "some progress" to get back on a sustainable fiscal path, but stressed the government had to press ahead on reforms required under the IMF-EU program.

But it also said that Europe's richer countries needed to keep up their backing for Athens.

"Greece's debt sustainability hinges critically on timely and vigorous implementation of the adjustment program, with no margin for slippage, and continued support from European partners and private sector involvement," new IMF chief Christine Lagarde said in a statement.

Lagarde said the Greek bailout is "delivering important results," and the Fund predicted the country would return to positive economic growth in the first half of 2012.

"The fiscal deficit is being reduced, the economy is rebalancing, and competitiveness is gradually improving," she said.

"However, with many important structural reforms still to be implemented, significant policy challenges remain," she said, citing the need for more work on narrowing the country's fiscal deficit and increasing economic productivity to restore growth.

The IMF statement said Greece needed to address high pay packages for public sector workers, the possibility of shutting down inefficient state firms, and widespread tax evasion.

It called the government's privatization goals -- required by the IMF-EU program to raise government revenues -- "a critical step toward boosting investment and growth" as well as cutting state debt.

"While the target of selling 50 billion euros of state assets by 2015 is very ambitious, the establishment of an independent privatization agency should help realize transparent and timely implementation."

It also cited the need for reform of the high labor taxes and the "inefficient judicial system."

The Fund meanwhile warned that Greek banks need to boost their capital but said it is "critical" that the European Central bank keeps providing liquidity to the country's financial system.

The IMF has made its largest commitment ever to a single country, 30 billion euros, as its part of the joint rescue of Greece.

Friday's release takes the total disbursed in the three-year program to 17.4 billion euros.

It came a day after private sector creditors and international banks met in Rome to make progress on a possible restructuring of the country's debt.

While many economists and financiers say a rescheduling of the debt is necessary, ratings agencies have warned that this could put the country technically in default, even if the rescheduling is voluntary.

Because a ratings downgrade in that case could make it more difficult for the ECB to keep supporting the country, the bank has condemned the idea of a restructuring of Athens' debt.

"No credit event, no selective default, no default. That is the present message of the governing council," ECB president Jean-Claude Trichet said on Thursday.

On Wednesday the German and Greek finance ministers said they agreed that Athens must boost its economic growth if the debt-ravaged country wants to restore its budget balance.

Wolfgang Schaeuble and Evangelos Venizelos agreed that an austerity plan a voted week earlier by the Greek parliament "must immediately be put into action to return Greece rapidly to a healthy economic situation," according to a German finance statement.

"But beyond this, other measures to sustain growth must be taken. It is only with a stronger private economy and with private investments that Greece will be able to achieve a balanced budget in the medium and long term," it added.

Analysis: Portugal poisoned by Greece in cut to junk status (Reuters)

LISBON (Reuters) – A downgrade of Portugal's credit rating to junk status underlines how the Greek crisis is poisoning other weak countries in the euro zone, regardless of their own efforts to shrink their debt and return to growth.

Moody's Investors Service on Tuesday became the first rating agency to cut Portugal below investment grade, causing the 10-year Portuguese government bond yield to leap more than 1 percentage point to euro-era highs.

The agency cited worries that administrative problems and slow economic growth might prevent the Portuguese government from hitting ambitious targets to shrink its budget deficit over the next three years under a 78 billion euro international bailout.

But Moody's also said efforts by the European Union to have private investors bear part of the burden of supporting Greece, through a "voluntary" rollover of maturing Greek debt, threatened investor confidence in Portugal as well.

If investors believe the EU may follow the Greek model and pressure them into bearing part of the cost of future aid to Portugal, they may become less willing to lend to Lisbon, reducing the chance that it can resume borrowing from markets in 2013 as planned, Moody's said.

The malign example of Greece, rather than anything which has happened inside Portugal in the last few months, appears to be the main reason for the decision by Moody's to slash Lisbon's rating by four notches, other analysts said.

"I think the main problem internally is growth and on that side not much has changed," said Diego Iscaro, an economist at IHS Global Insight. "So four notches is possibly more to do with Europe-wide developments.

"The concern of Moody's is that we may see a repetition of Greece with Portugal next year. It is a different situation, but what Moody's is saying is that the resolution with the private sector may be the same."

SWITCH WITH IRELAND

The Moody's downgrade means many investors will now view Portugal as the euro zone's biggest danger spot after Greece. Until recently, that position was held by Ireland, which is still rated as investment grade by all three major agencies; perceptions began to change when the Portuguese 10-year bond yield rose above the Irish yield in mid-June.

Moody's said there was a growing risk that Portugal would need a second international bailout, beyond the 78 billion euros of emergency loans which are due to flow into 2013. The size of any additional bailout would depend on how long the EU needed to keep Portugal afloat.

Under current plans, Lisbon is expected to raise 10 billion euros in long-term bonds in 2013 and 6 billion euros in the following year, Iscaro said. So financing Portugal through the end of 2014 might require an extra 16 billion euros of loans -- depending on many factors including Lisbon's success in cutting its budget deficit and selling state assets.

Iscaro said it was only likely to become obvious around the third quarter of next year whether Portugal would need a new bailout.

But Citibank, in a report on Wednesday, said a second bailout was probable.

"Portugal is likely to require a second package at some point in 2012, when the International Monetary Fund is likely to request additional measures to close the funding gap for the 12 months ahead -- as was the case in Greece," it said.

Many Portugal-based economists disagreed with the Moody's downgrade, arguing that the agency had not paid enough attention to the determination of Lisbon's new center-right government in meeting fiscal goals set by the EU and the IMF.

The government, which took office last month, has already announced an extraordinary tax on year-end bonuses and promised to speed up spending cuts beyond the terms of the bailout deal, which was agreed before a June 5 general election.

"We think this cut by Moody's was absurd and out of time. It did not even consider the new government's measures and it did not wait for the first evaluation of the implementation of the austerity plan," said Filipe Silva, head of debt at Banco Carregosa, a Portuguese private bank.

But as long as the Greek crisis suggests to investors that they may be forced to restructure their holdings of debt in weak euro zone countries, Portugal's success with domestic fiscal reforms may fail to impress the rating agencies or markets.

Richard McGuire, interest rate strategist at Rabobank, said the Moody's downgrade had underlined that "in terms of 'restructuring dominoes', Portugal is the next man standing."

"The prospect, or even simple speculation, of a series of defaults will increase the risk of contagion spreading," McGuire said.

(Editing by Andrew Torchia)

European stocks, euro rebound on Greece progress (AFP)

LONDON (AFP) – European stocks rebounded and the euro recovered against the dollar on Friday as investors cheered a breakthrough in the eurozone's bid to resolve Greece's debt crisis, analysts said.

World markets had slumped on Thursday as weak US and Chinese data dented confidence in the global economic outlook and as Greece's problems dragged on.

However they swiftly recovered on Friday after Greece, the EU and the IMF agreed on the final details of a 28-billion-euro ($40-billion) savings plan which Athens must implement over five years to obtain cash to pay its immediate debts.

In late morning deals, London's benchmark FTSE 100 index of top shares jumped 1.27 percent to 5,746.33 points. Frankfurt's DAX 30 climbed 1.12 percent to 7,229.37 points and in Paris the CAC 40 gained 0.46 percent to 3,805.30.

The euro climbed to $1.4293 from $1.4257 late on Thursday in New York. The dollar fell to 80.16 yen from 80.52 yen.

Oil prices meanwhile steadied after plunging one day earlier when the International Energy Agency decided to tap emergency crude reserves to make up for lost Libyan supplies.

But in Italy, leading bank shares slumped up to 8.0 percent.

Markets recovered on Friday "after positive sentiment coming out of Europe as EU ministers say they will do 'anything it takes' in relation to Greece," said Spreadex trader Simon Furlong.

"However, we are not out of the woods yet. With disappointing jobs figures in the US, (Federal Reserve chairman) Ben Bernanke downgrading US growth output and a large opposition to austerity measures within Greece's parliament, the light at the end of the tunnel is very dim indeed."

The European Commission said the deal among international backers on the ground in Athens now has to be "translated into concrete legislative measures" by Greece. Prime Minister George Papandreou is hoping that parliament will next week approve his austerity measures.

Meanwhile worries about the global economy were stoked after the US Labor Department on Thursday reported an unexpected increase in initial jobless claims, by 9,000 to 429,000 in the week to June 18. Elsewhere, the Commerce Department said new-home sales fell 2.1 percent in May.

Ahead of the data, Bernanke had on Wednesday warned of economic headwinds that could persist for longer than expected.

US stocks ended mixed on Thursday after steep initial losses spurred by the series of gloomy economic reports from the United States, Europe and China.

Tokyo's benchmark Nikkei-225 index closed up 0.85 percent at 9,678.71 points on Friday.

"The financial markets have stabilised," noted Derek Halpenny, European head of currency research at The Bank of Tokyo-Mitsubishi UFJ.

"Concerns over a number of factors remained elevated however, and next week brings the crucial austerity votes that appear to require not just a win but a win that signifies some degree of unity in Greece in favour of the austerity program."