LONDON (MarketWatch) -- An agreement by euro-zone leaders on a joint contingency plan with the International Monetary Fund to provide aid to Greece received a lukewarm reaction in financial markets, with the euro rebounding from 10-month lows and Greek government bond modestly outperforming their counterparts.
The yield premium demanded by investors to hold 10-year Greek government bonds over benchmark German bunds narrowed to around 3 percentage points Friday, in from around 3.10 percentage points Thursday and from around 3.5 percentage points earlier in the week.
The euro /quotes/comstock/21o!x:seurusd (CUR_EURUSD 1.3401, +0.0124, +0.9340%) rose 0.8% versus the U.S. dollar to change hands at $1.3378 after hitting a 10-month low versus the U.S. unit below $1.33 on Thursday. The euro began the week above $1.35.
Shares of Greek lenders rallied. See full story.
The agreement "should help provides some stability (for Greek bonds) against bunds," particularly following the European Central Bank's decision Thursday to extend looser collateral requirements beyond the end of 2010, said Nick Stamenkovic, fixed-income economist at RIA Capital in Edinburgh. Read about the ECB's collateral decision.
Stamenkovic said the agreement should help Greece meet its upcoming debt financing obligations. Greece has around 20 billion euros ($27 billion) in debt coming due in April and May.
Greek officials will want to see the spread between Greek bonds and German bunds narrow further as they approach crucial refinancing needs in April and May.
Details of the plan, which would be implemented only as a last resort, remain murky. The agreement, however, represents a major compromise that would see the Washington-based IMF play a role in economic affairs within the euro zone while also paving the way for bailouts within the single-currency region.
A joint statement by euro-zone leaders didn't provide details on the size of any aid package. Reuters reported that aid would total between 20 billion to 22 billion euros ($29.2 billion). Euro-zone countries would fund two-thirds of the aid, with the IMF providing a third.
The package would involve "substantial" IMF financing and a "majority of European financing," the statement said. Euro-zone countries would contribute to coordinated, bilateral loans.
Euro-zone states would have to agree unanimously to disburse bilateral loans. The loans would carry strict conditions and would be provided at market interest rates without a subsidy.
Economists have charged that a role for the IMF, which usually provides aid to developing nations, risks permanently tarnishing the standing of the euro, underlining the inability of the euro zone to enforce its own fiscal rules.
German revolt
IMF participation came at the insistence of German Chancellor Angela Merkel. Opinion polls show Germans strongly oppose providing aid to Greece or other troubled euro zone nations. Local elections are set to take place in Germany on May 9.
Germany's call for IMF participation was backed initially by the Netherlands and Finland. France, the euro-zone's second largest economy after Germany, initially opposed the move, as did European Central Bank President Jean-Claude Trichet.
French President Nicolas Sarkozy, however, agreed to including the IMF after a meeting with Merkel on the sidelines of the European Union summit Thursday.
Trichet late Thursday was quoted as saying he was "extremely happy" that euro-zone leaders had reached a deal. But earlier in the day, he said in an interview with French television that a role for "the IMF or another body" in place of euro-zone officials or governments "would obviously be very, very bad."
The critical comments were credited with sending the euro to Thursday's lows.
The agreement may offer only limited relief to euro bulls, said strategists at UniCredit Bank in Milan, since aid will only be available as a last resort. The euro regained its footing after Trichet backed off his earlier criticism of the IMF role, but the single currency needs to make a move above chart resistance at $1.3440 or risk falling back toward $1.3250, they said.
While Greece's near-term financing worries have eased, "it would be wrong to think that the crisis is over," said Jonathan Loynes, chief European economist at Capital Economics.
Market interest rates still remain very high and Greece still faces long-term economic pain as it attempts to slash its budget deficit from 12.7% of gross domestic product -- more than four times the E.U. limit -- to 8.7% this year and less than 3% in 2012, economists said.
And concerns remain over other debt-strapped euro-zone countries, such as Portugal, which was downgraded by Fitch Ratings earlier this week, and Ireland.
William L. Watts is a reporter for MarketWatch in London.
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