Euro zone leaders won muted approval from financial markets on Friday for their agreement to create a safety net for debt-ridden Greece, but a row over the IMF's role flared up just as it had seemed settled.

Under an accord announced late on Thursday, Athens would receive coordinated bilateral loans from other countries that use the euro and help from the International Monetary Fund if it faced severe difficulties.

Greece, which must borrow some 16 billion euros between April 20 and May 23 alone to refinance maturing debt, declared markets were ditching fears that Athens would fail to honor its debt repayments, and the euro rose against the dollar.

The market is quickly pricing out any probability of default risk, Petros Christodoulou, the head of Greece's debt agency, told Reuters. [nATH005314]

But a leading European Central Bank policymaker said the IMF should play no role in any solution for the problems of a euro zone member state, only a few hours after ECB chief Jean-Claude Trichet had apparently reluctantly accepted that the Washington-based lender might have a part to take.

The IMF itself has yet to make any public comment.

Injecting further uncertainty, a major German state bank said it was still waiting for the Berlin government to decide whether it should buy any Greek government bonds.


Market reaction was muted. The yield on the 10-year Greek government bond fell as low as 6.21 percent, well off this week's peak of 6.67 percent.

The spread over benchmark German Bunds slipped to 306 basis points, the tightest in more than a week.

But that still means Greece would have to pay roughly double the interest rate on any new bonds it sells than Germany would, a burden that Athens can ill-afford as it fights to cut its huge budget deficit with unpopular austerity measures.

The euro rose 0.7 percent against the dollar from a 10-month low after falling late on Thursday as investors took the view that IMF involvement showed the 16-country euro zone could not handle its problems alone.

The fact that there will be a mechanism in place reduces the risk of the euro zone breaking up, said Johan Javeus, currency strategist at SEB in Stockholm. But going forward the market will be focusing more on whether Greece will be able to deliver the austerity measures it has promised.


German Chancellor Angela Merkel said Europe had proven its ability to act in concert. It is important in the long term that the currency -- which has been such a success for freedom and cooperation -- stays stable. That is why yesterday was a very important day for the euro, she said.

But the IMF's role, largely at Merkel's insistence, created new tensions.

ECB policymaker Vitor Constancio made clear he didn't like any suggestion of IMF involvement in a euro zone family problem. As I said during my hearings in European parliament, I think the IMF is not necessary and should not have a role, he told reporters.

Constancio has been nominated as ECB vice-president and was backed by the European parliament on Thursday.

ECB President Trichet has had similar misgiving, making clear that the euro zone's finance ministers, individual governments and the ECB should handle crises.

But after the deal was sealed, Trichet sounded a different note, saying he was extraordinarily happy that the governments of the euro area found a workable solution, adding that the aid mechanism was unlikely to be activated.


Greece needs to find buyers for its bonds at a moderate price. But on Friday uncertainty hung of over a big holder of government debt, German state development bank KfW.

We have decided not to subscribe any new Greek bonds, KfW Chief Executive Ulrich Schroeder told a news conference.

German Finance Minister Wolfgang Schaeuble would have to decide whether KfW would take part in loans to Greece. We are waiting very patiently for this (decision), Schroeder said.

A statement by euro zone leaders included no numbers on Thursday's deal, but a senior European Commission source said the support package would be worth 20-22 billion euros ($27-29 billion) if required in an emergency.

French President Nicolas Sarkozy said the euro zone would put up two-thirds of the money, and the IMF the rest.

Tough terms imposed by Merkel mean the mechanism could be activated only under strict conditions and would require the unanimous approval of the euro zone, giving Berlin a veto.

Merkel had long resisted offered aid to Greece because of public opposition in Germany and concerns that any deal could face a legal challenge at home. She also faces a tough state election in May that she can ill afford to lose.

(Additional reporting by Ian Chua in London, Alexander Huebner in Berlin, Sergio Goncalves and Shrikesh Laxmidas in Lisbon; George Georgiopoulos in Athnes, writing by David Stamp; editing by Mike Peacock)