But the government still faces strong resistance to structural reforms – from opening up closed-shop professions such as truck driving to cutting about 50,000 jobs in local government and lossmaking state enterprises.

In an interview with the Financial Times, Mr Papaconstantinou said in the first half of this year the budget deficit had been slashed by 45 per cent after deep cuts in public consumption and capital investment.

He said Greece has taken more measures than were necessary to cut the deficit this year from 13.6 per cent to 8.1 per cent of gross domestic product.

A 30-member mission from the so-called troika – the EU, IMF and European Central Bank – arrived in Athens this week to assess reforms launched in return for a €110bn loan package, which rescued Greece from a sovereign default.

Mr Papaconstantinou sounded confident that the troika would award Greece a pass mark on progress, enabling it to draw down a second €9bn ($11.7bn, £7.5bn) loan tranche in September.

“We are ahead of the curve, mostly due to reduction of expenditures … Revenues are lagging slightly behind … but we’re reasonably optimistic that even on the revenue side we’ll meet the targets,” he said.

An increase of 4 percentage points in value added tax, on top of a 30 per cent rise in excise taxes, would help boost inflows in the second half, he said.

The impact of cuts in public sector wages and pensions on overall spending would bring further reductions, he added.

Mr Papaconstantinou also predicted that Greece’s recession would be shallower than forecast, with the economy set to shrink this year by 3 to 3.5 per cent, compared with an earlier projection of 4 per cent.

But he admitted there were “danger zones” that could undermine fiscal consolidation, such as persistent spending overruns at state hospitals.

After weathering six months of strikes and demonstrations over cuts in public sector pay and pensions, Mr Papaconstantinou said, the remaining reforms should be implemented as quickly as possible.

“Every time you try to reform something, there are going to be vested interests that rise up against it, so the more we concentrate it into a short time period, the better,” he said.

Truck drivers went on strike this week to protest against plans to raise the number of operating licences, while flights at Athens airport were delayed by air traffic controllers working to rule to show their opposition to changes in labour regulations.

But Mr Papaconstantinou was reluctant to talk about public sector job cuts, saying the current plan calls for workers to take early retirement or move to other state-controlled organisations. “It doesn’t involve straight firings, although we are not renewing a large number of non-permanent contracts … That is where we are at the moment. We shall see where that gets us,” he said.

Story from Financial Times

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But also like so many other European initiatives, it seemed Monday to somehow be working anyway.

Despite a shower of criticism from analysts who said the tests of bank resiliency were rigged to allow most institutions to pass, the results won cautious approval from investors, who welcomed additional clarity — however imperfect — about the financial system’s vulnerability to a Greek debt default or other potential economic shocks.

In the first full trading day since European regulators released the tests, bank shares rose, while the cost of insuring bank bonds using credit default swaps fell. The interest rate that banks charge each other for short-term loans also declined, a tentative sign that the stress tests were helping to ease banks’ fears about each others’ creditworthiness.

The stress test report issued by the Committee of European Bank Supervisors “contains little information about the stability of the banking system with respect to a sovereign debt crisis,” analysts at Credit Suisse wrote in a report Monday. “Nevertheless, it contains some reassuring information about the ability to withstand a more adverse economic scenario.”

Several analysts also said that they welcomed the additional information about Spanish banks, where both the size of the country’s debt and the state of its thrift institutions have been a major source of worry.

“Spain needs to restore credibility to parts of its banking industry and the additional disclosures are a good first step,” analysts at UniCredit wrote in a note.

The European authorities faced a similar storm of criticism in May when, confronted with a meltdown in the bond markets, they pledged €750 million, or $970 million, to ensure that Greece and other European Union nations would be able to refinance their government bonds.

Analysts pointed out that lending Greece more money was not going to make the country any more solvent. Still, the show of resolve eventually calmed fears to the point where the European Central Bank has been able to wind down its emergency purchases of Greek debt and other bonds. The E.C.B. said Monday that last week it bought debt on open markets worth €176 million, down from €16.5 billion in mid-May.

There was still plenty of skepticism Monday about whether the stress tests would do what they were supposed to. Richard Barwell, an economist at Royal Bank of Scotland, said that the uptick in European bank shares Monday could just mean that investors were relieved that fewer banks than expected would have to raise more capital.

If banks issued more shares to bolster their balance sheets — one likely option — the value of existing shares would be diluted. “That would have felt pretty nasty,” Mr. Barwell said.

“These tests were designed to make sure as many banks as possible passed,” he said. “In the short term, everyone is happy. But in the medium term, we may well come back to the question of how vulnerable is the European banking system to a sovereign debt event. Then we will be back at square one.”

In a sign of how difficult it was to coordinate the tests among 20 European bank regulatory agencies and 91 institutions, several German banks did not get the memo that they were expected to also disclose their holdings of European government debt. Doubts about which banks are holding such bonds, and would be vulnerable to a debt shock, have been at the center of bank woes.

Deutsche Bank shares fell in early trading after investors took the Frankfurt bank’s failure to publish its holdings of Greek and other debt as a sign that it had something to hide.

The stock later recovered after the bank, which had already provided most of the information in June, said it would publish the holdings in detail on Tuesday. The half-dozen other institutions that initially did not publish the information were expected to by the end of Monday. Deutsche Bank declined to comment, but officials in the government and at other banks said that the German institutions did not understand that the disclosure, while officially voluntary, was de rigueur.

While analysts griped that there were still big gaps in the information available about bank risks, there was enough data that many were already running their own stress tests based on different assumptions. For example, analysts at Nomura applied the stricter definition of capital reserves as was used in the U.S. stress tests last year.

Using that standard, Germany’s public-sector landesbanks would probably fail the stress tests, a Nomura analyst, Jon Peace, said during a conference call with investors Monday. He and other analysts said that weaker banks in Germany, Spain and other countries needed to bolster their reserves for confidence to return to the financial system.

“There will continue to be concerns over bank solvency until relatively large sums of capital are injected into the system,” Mr. Peace and other Nomura analysts wrote in a report on Monday.

Under pressure from debt markets, regulators and bad publicity, some institutions have already begun to seek new investment.

On Monday, the Spanish Confederation of Savings Banks held a presentation for investors in London as part of efforts to raise €2 billion in additional capital, Reuters reported.

“All of the feedback we are getting from the market is that there is a lot of interest,” Jorge Gil, managing director of the confederation, told Reuters.

Though the landesbanks are owned by state governments and local savings banks, and do not have publicly traded shares, they will still face market pressure to strengthen their ability to withstand shocks. The cost of insuring against default rose for several landesbanks on Monday, even though the spreads on credit default swaps for most other European banks fell, according to data from Markit, a research firm.

Norddeutsche Landesbank in Hanover, which narrowly passed the stress test, was among those whose C.D.S. spreads rose. Thomas Breit, a spokesman for the bank that is also known as NordLB, said that the bank had recently raised additional money via bond issues and was likely to do so again in the medium term.

“We know we have to raise more capital,” he said.

Story from The New York Times

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A capital increase of at least €1.1bn would be linked to an offer by Piraeus last week to acquire two loss-making state- controlled Greek lenders – Agricultural Bank of Greece (ATEbank) and Hellenic Postbank.

The Piraeus executive said: “In the light of opportunities created by the potential acquisition, we’re considering a capital increase in due course.”

Pressure will mount on Piraeus to shore up its balance sheet in response to the test results, Athens-based analysts said.

The fourth-largest Greek lender was among eight European banks that scored a tier one capital adequacy ratio of 6.0 per cent – the minimum pass mark.

However, the Piraeus executive claimed the tier one ratio currently stood at 6.4 per cent under the “adverse scenario” following a recent sell-off of Greek government bonds held in its trading portfolio.

ATEbank was the only one of six Greek lenders to fail the test with a tier one ratio of 4.4 per cent – a capital shortfall of €243m. Its managers had already decided to seek a €1bn capital increase.

ATEbank had been widely expected to fail, in spite of a forecast last week by Greece’s central bank that all the Greek lenders would “easily” pass the stress tests.

Piraeus’s planned capital increase would raise its tier one ratio to 9.7 per cent. It would also fully cover its €701m offer for the Greek state’s stakes of 77 per cent stake in ATEBank and 33 per cent in Postbank. Both banks are listed on the Athens stock exchange.

The remaining amount would fund repayment of a €370m capital injection in 2008 by the Greek state through a support package for the banking sector.

The finance ministry responded to Piraeus’s unsolicited offer by announcing it would appoint an adviser to value both state-controlled banks before holding a privatisation tender. It said it would participate fully in ATEbank’s planned capital increase, due to take place by December.

It was not immediately clear whether ATEbank would seek the remaining funds from a new €10bn financial stability fund for Greek banks which is backed by the International Monetary Fund.

Other Greek banks are also likely to consider holding rights issues in the coming months. Banks are heavily dependent on the European Central Bank for liquidity after losing access to wholesale funding markets because of Greece’s sovereign debt crisis.

Story from Financial Times

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At a time of increased tension in the Aegean, where Turkish vessels and aircraft have been encroaching on Greek air space and territorial waters, Papandreou also stressed the importance to Athens of a Cyprus solution. “For us, solving the Cyprus problem is a precondition for full normalization of Greco-Turkish relations,” said Papandreou following talks with Cyprus President Dimitris Christofias in Nicosia.

“As far as Greece and Turkey are concerned, Cyprus can either divide us or unite us. Obviously we seek the latter,” said the Greek premier, who on Tuesday received Cyprus Foreign Minister Markos Kyprianou in Athens for talks. Speaking a day after Turkish-Cypriot leader Dervis Eroglu accused Nicosia of intransigence, Papandreou appealed to the Turkish-Cypriot administration to “seriously study” a package of proposals put forward last week by Christofias. Papandreou praised the efforts of Christofias in pursuing a consensus with hardliner Eroglu and said Greece backed the Cyprus leader’s proposals. “This shows that President Christofias is one step ahead in initiatives to solve the Cyprus problem,” Papandreou said. Later yesterday, the Greek premier flew to Israel for an official visit.

One of Christofias’s proposals sees the port of Famagusta in the Turkish-occupied north of Cyprus being opened to direct trade under the auspices of the European Union in exchange for the return of the area of Varosia to Greek Cypriots. Eroglu on Tuesday ruled out the return of Varosia and called on Nicosia to be more cooperative with the Turkish-Cypriot administration.

Story from Kathimerini

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Six Greek banks took part in the stress tests conducted by European Union experts on 91 European banks in total, among which only ATEbank failed.

Experts of the Committee of European Banking Supervisors checked if banks across Europe can overcome more pressures due to the international economic crisis in the near future.

The result is regarded positive by Greek officials and analysts, since the Greek banking sector is under enormous pressure since the outbreak of the Greek debt crisis in late 2009. “The results are positive and prove that the Greek banking system can tackle even more difficult conditions than the current one,” said Papaconstantinou in a first official reaction.

He added that in order to protect the good health and stability of the Greek banking sector, the Central Bank of Greece is in touch with all Greek banks participating in the stress tests to evaluate the outcome and examine the possibility of raising capital.

State-controlled ATEbank is given a deadline by the Greek government until Dec. 31 this year to make and implement a viable plan to face challenges. “The Greek government guarantees ATEbank’s credibility,” underlined Papaconstantinou.

Greek analysts added that after Friday’s test ATEbank will have to seek new capital up to 240 million euros (307.6 million U.S. dollars) or the Greek government will have to examine more carefully the offer made recently by Greek commercial Piraeus Bank to buy ATEbank and also state-controlled Greek Postbank.

After a cabinet meeting held earlier on Friday afternoon, Papaconstantinou announced that next week the Greek government will appoint two or three advisors to suggest the next moves Greek state should make in the banking sector and a better management of its vast real estate property.

Greek media stressed that this decision paves the way for mergers and privatizations of Greek banks.

Athens also has the option to financially assist ATEbank from a 10 billion euros (12.8 billion U.S. dollars) Financial Support Fund created last month in the framework of the 110 billion euros (140.9 billion U.S. dollars) safety net which was activated by the European Union and the International Monetary Fund for debt-ridden Greece.

Representatives of the rest of the six Greek banks which passed the EU stress tests voiced satisfaction on the results and more optimism for the future of the banking sector in Greece.

Story from Xinhuanet

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The three countries are considered among the most vulnerable of the 16 nations that use the euro, with high levels of government spending and weakened economies. Greece approached default in the spring and is now operating under a joint rescue from the European Union and the International Monetary Fund. Borrowing costs for other countries had risen amid concern that they, too, might struggle to pay their debts.

But the promise of a trillion-dollar contingency fund for euro-zone countries, extended by the E.U. and the IMF in May, has allowed those nations to raise money as needed. Interest rates remain comparatively high — Ireland will pay interest of more than 5.5 percent on the roughly $1 billion of 10-year bonds it sold on Tuesday, nearly three percentage points more than benchmark German bonds.

Yet demand at that price was high, with investors offering to buy three times the amount of debt that Ireland offered.

The successful sales add to evidence that a brewing crisis over sovereign debt in Europe has abated — at least for now, and at least within the euro zone. Since the emergency fund was approved, the euro has climbed from below $1.20 to around $1.28.

But in the longer term, prompted by their high levels of debt, several of the countries are struggling to slash programs and services, and to overhaul basic aspects of their economic policy.

In a recent research note, Barclays Capital characterized Spain as “solvent with risks” — able to manage its debt load for now, but perhaps facing a need to raise tens of billions of dollars to recapitalize a weakened banking system, and still facing the brunt of a sharp reduction in government spending. Ireland enjoyed stronger-than-expected growth in the first part of the year as its exports rebounded, but a “fiscal squeeze” caused by public-sector pay cuts and other reductions has diminished domestic demand so much that the economy is still expected to contract over the full year, according to a recent analysis by Capital Economics’ Europe economist Ben May.

Outside the euro area, risks may be even higher. Hungary on Tuesday was unable to raise as much as it had hoped in a bond issue, after a breakdown in talks with the IMF over the weekend raised new questions about the country’s willingness to follow through with an economic turnaround plan. The country received access to $20 billion in aid from the IMF, the E.U. and the World Bank in 2008 as investors turned from the country and the recession hit.

The IMF conducts periodic reviews on its loan programs to see if the countries involved are living up to their commitments. Over the weekend, the fund said that Hungary had made progress but that “more needs to be done” to control deficits and retool money-losing, state-owned businesses.

“While there is much common ground, a range of issues remain open,” the IMF’s head of mission in Hungary, Christoph Rosenberg, said in a statement announcing that an IMF group had ended talks with Hungarian officials without agreement on possibly extending the rescue plan.

Hungary’s bailout was seen as one of the successes in the IMF’s response to the global financial crisis, but a change of ruling party in the recent elections has complicated relations between the country and the fund. An incoming government official said the country was approaching bankruptcy, while new leaders have been hesitant to meet all the terms agreed to by their predecessors.

Story from Washington Post

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Six Greek banks, which make up about 90 percent of the country’s market, are among the 91 banks undergoing stress tests by the European Union. The results are due to be announced after stock markets close Friday.

“Greek banks are facing the stress tests. We are sure that they will be able to emerge unscathed,” Finance Minister George Papaconstantinou said in a speech at a business luncheon.

The government is currently considering a euro701 million ($911 million) offer by private Piraeus Bank to buy stakes in state-controlled ATEBank and Hellenic Postbank.

“Every proposal that is made, … we examine with great care,” Papaconstantinou said.

All three Greek banks are on the stress test list, long with the National Bank of Greece, EFG Eurobank Ergasias and Alpha Bank.

The stress tests simulate how lenders would fare if the economy worsens sharply, financial market conditions deteriorate and borrowing costs soar. They will also examine banks’ exposure to European government debt and the quality of the capital they currently hold against risks.

Story from Forbes

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In an interim report based on its mid-June staff visit to Athens, the Fund said Greece’s budget implementation was on track, but pointed to a couple of risk areas, including hospitals and social security funds.

The IMF and the European Union gave Greece a 110 billion euro bailout in exchange for a string of painful economic adjustments designed to rein in a ballooning budget deficit. The EU released its Greek report last week.

The IMF acknowledged that financial markets remained skeptical that Greece would avoid a restructuring even after the bailout, and said the spread between Greek and German government bonds was too wide.

“Speculation that Greek debt restructuring may have only been postponed, rather than decisively put to rest, clearly weighs on sentiment,” the IMF said. “Evidence needs to build that the program is being fully implemented, supported by social consensus and with prospects for a growth recovery.”

The Fund said Greek banks were having a hard time with tight liquidity conditions, and solvency buffers had suffered “some erosion.”

Although the economy contracted by 2.5% year-on-year in the first quarter, that was in line with projections, the IMF said, adding that the downturn was likely to become “more acute as the year goes on.”

Story from Money Control

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The picture is mixed as some parts of the country have seen prices fall more than others, according to figures from Propindex and the Foundation for Economic and Industrial Research.

Prices fell 5.4% in the Attica region, which includes the capital Athens and 9.8% in Thessaloniki, Greece’s second biggest city. Prices dropped 12.6% in the rest of Greece in the first quarter.

Apartment prices fell last year to 2006 levels following a two year rise, according to the report which uses bank figures, including those of Greece’s three biggest lenders.

Commercial property vacancies in Athens increased 1% from the first quarter of 2009 to 17.7%, a rising trend since 2007, the report also shows.

The Greek economy is in recession and Prime Minister George Papandreou has raised taxes, cut wages and reduced spending in a bid to tame a deficit that reached 13.6% of gross domestic product last year, more than four times the European Union limit.

Changes to the real estate tax system are currently being examined by government officials. Taxes on real estate transactions in Greece are currently based on the government’s assessment of the property’s value, which considers the area and the amenities, rather than the actual market value, which is generally higher. Finance Minister George Papaconstantinou proposes to change this next year to bring in more revenue and mean higher costs for buyers and sellers.

The low prices offer bargains for buy to rent property investors who aim to let out their properties during the busy summer holiday season. Top of the range luxury villas in parts of Greece can fetch €5,000 a week in rent.

It has also been reported that the Greek government is proposing to sell or offer long term leases on property it owns on the country’s 6,000 islands to bring in much needed cash. Mykonos, which is one third owned by the government, is expected to be one of the first to be offered. It is likely to go to a real estate investor who can not only afford the price of the sale itself but who is also willing and able to invest cash into developing a new luxury tourist complex on the island.

Story from Property Wire

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The decline pushed bund yields up from near the lowest in a week as Greece sold 26-week bills at a rate of 4.65 percent. Padhraic Garvey, a fixed-income strategist at ING Groep NV, had predicted the funding cost would be about 5 percent. Portuguese bonds dropped as Moody’s Investors Service cut the country’s credit rating.

“With the pretty solid auction in Greece, sentiment has turned a bit,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse AG in Zurich. “This has been the main event for the bund market today.”

The yield on the 10-year German bund rose five basis points to 2.63 percent as of 4:14 p.m. in London. The 3 percent security maturing in July 2020 fell 0.41, or 4.1 euros per 1,000-euro ($1,264) face amount, to 103.17. The yield had declined to 2.57 percent yesterday, the lowest since July 7, and reached a record low of 2.5 percent on June 8.

Greek two-year securities rose, with the yield falling 130 basis points to 9.79 percent. The extra yield investors demand to hold 10-year Greek debt over bunds slipped seven basis points to 757 basis points. The spread has narrowed from 965 basis points on May 7, the most since before the euro’s 1999 debut.

European stocks climbed for a sixth day, with the Stoxx Europe 600 Index advancing 1.8 percent and erasing this year’s losses. It has risen 8 percent since July 5.

‘Thumbs Up’

Bunds had been steady earlier today after the ZEW Center for European Economic Research said its index of investor and analyst expectations fell to a 15-month low in July, a third straight monthly drop, in the wake of Europe’s sovereign-debt crisis. German bonds have benefited as concern that nations in southern Europe may default on their debt drove investors to the safest assets.

“We are happy with the composition of the investor base,” including foreign investors, Petros Christodoulou, head of the country’s debt management agency, said by phone. “Starting from the very short end of the market, this is a thumbs up for the fiscal policy that has been implemented.” Foreign investors bought 20 percent of the securities sold today, he said.

Portugal, whose bonds are the worst performers in the euro region after Greek debt, had its credit rating cut two steps to A1 by Moody’s because of a growing debt burden and weak economic growth prospects.

“The Portuguese government’s financial strength will continue to weaken over the medium term,” Moody’s said in a statement today, adding that the outlook is stable. “The Portuguese economy’s growth prospects are likely to remain relatively weak unless recent structural reforms bear fruit over the medium-to-longer term.”

The yield on Portuguese bonds maturing in June 2020 rose 10 basis points to 5.53 percent. The two-year note yield was four basis points higher at 3.32 percent. The spread over benchmark German bunds widened by 3 basis points to 283 basis points.

Story from Business Week

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The shortfall, on a fiscal basis, fell to 9.65 billion euros ($12.1 billion) from 17.87 billion euros in the year- earlier period. That beat the government’s 39.5 percent target, according to an e-mailed statement from the Athens-based ministry.

Net ordinary budget spending fell 12.8 percent, compared with a goal of 5.5 percent for the year, according to the statement. Ordinary budget revenue increased 7.2 percent in the period, falling short of a 13.7 percent target.

Finance Minister George Papaconstantinou said last week the country may beat its target of reducing the budget gap, the European Union’s second widest, to 8.1 percent of gross domestic product from 13.6 percent as tax increases and spending cuts kick in and the economy contracts less than forecast.

Today’s figures “don’t yet fully reflect all the fiscal measures included in the government’s program for the year,” according to the statement.

Meeting deficit targets is key to Greece receiving 110 billion euros of emergency loans agreed on by euro-area leaders and the International Monetary Fund to stave off a default after soaring borrowing costs locked Greece out of capital markets.

Story from Business Week

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The six-month bills offered a yield of 4.65 per cent, comfortably below the 5 per cent level seen as a benchmark for Greek paper.

The issue was subscribed 3.64 times.

Greece is paying interest of about 5 per cent on the €110bn, three-year bail-out package approved in April by the European Union and International Monetary Fund.

The yield on Tuesday’s issue was marginally higher than the 4.55 per cent paid by the Greeks in April for six-month paper shortly before the bail-out, indicating that confidence remains fragile.

Greece dropped plans to roll over 12-month bills on Tuesday amid concern that yields could hit 7 per cent and send a negative signal to investors ahead of next week’s auction of three-month paper.

Petros Christodoulou, head of Greece’s debt management agency, said: “We’re re-accessing the short end of the market. I’m relieved because the yield was below the 5 per cent no-cross zone … and I’m pleased by the participation of the foreign banks.”

George Papaconstantinou, finance minister, said he was encouraged that 10 foreign banks in Greece’s group of primary dealers took part in the auction, “something that doesn’t usually happen in issues of this type”.

The auction came as Greece was commended by EU partners for “exceeding expectations” with fiscal and structural reforms enacted over the past two months.

Experts from the “troika” – the EU, the European Central Bank and the IMF – will make a detailed assessment of progress at the end of this month before approving the release of the second quarterly loan tranche in September.

Investors warned Greece against drawing too much optimism from one successful attempt to raise money in the private markets, particularly as yields were close to the 5 per cent that Athens had to pay for emergency bail-out funds.

Harviner Sian, senior euro rates strategist at RBS, said: “Greece raised some money, so it is a relative success, but they are a long way from solving their problems. They can’t just implement austerity for six months and then expect the problems to disappear.”

Elizabeth Afseth, fixed income strategist at Evolution, said: “It is positive that the Greeks have raised some money, but it is only six-month bills and mainly domestic institutions buying. The Greeks still have a lot to do to repair their economy.”

Greece plans to raise a further €2.4bn of three-month debt next Tuesday.

Story from Financial Times

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Regulators are examining the strength of 91 banks to determine if they can survive potential losses on sovereign-bond holdings. Ministers at a meeting today in Brussels will debate how much of the detail and results to disclose as investors await their publication by the end of July.

“The market is asking for details and for something else: if a bank has difficulties where will it get the funds to recapitalize?” Daniel Gros, director of the Centre for European Policy Studies, said in an interview with Bloomberg Television today. “Stress tests without details don’t make sense.”

Regulators are counting on the tests to reassure investors about the strength of financial institutions from Germany’s WestLB AG and Bayerische Landesbank to Spanish savings banks as the debt crisis pummels the bonds of Greece, Spain and Portugal. Officials have yet to spell out how they would deal with a bank that fails the tests and whether any additional capital will be provided by national governments or the European Union.

Credit Suisse Group AG analysts said July 8 the “real test” will be the readiness of governments to respond. The “important point being tested is the ability and willingness of the official sector to provide capital to firms which fail,” analysts led by Daniel Davies in London said in a note.

‘Catalyst’

The Bloomberg Europe Banks and Financial Services Index rose 9.4 percent last week, its biggest weekly gain in a year. It slipped 0.4 percent as of 1:00 p.m. today.

The meeting of finance ministers from the 16 euro countries is scheduled to begin at 5 p.m. and Luxembourg’s Jean- Claude Juncker, who heads the group, will hold a press conference after the talks.

German Finance Minister Wolfgang Schaeuble said before the meeting that the tests will be an “important step” toward easing investors’ concerns about the strength of banks.

Ministers will also discuss proposals to revamp banking supervision, tougher sanctions on countries breaching deficit limits and early monitoring of national budgets. The meetings continue tomorrow when the ministers will be joined by their colleagues from the other EU nations.

‘Fundamental’

Banks globally could lose as much as $900 billion in a worst-case scenario where Greece, Ireland, Italy, Portugal and Spain all have to restructure their debt, Nomura Holdings Inc. estimates. Moody’s Investors Service said June 11 that EU banks can absorb losses on government and private debt in Greece, Portugal, Spain and Ireland without having to raise funds.

Stress tests on Portuguese banks showed they have “good” solvency ratios, confirming the solidity of the banking system, Portugal’s Finance Ministry said today in an e-mailed statement.

One concern is that the tests aren’t rigorous enough and won’t assume large enough potential losses, said James Nixon, co-chief European economist at Societe Generale in London. Regulators have told lenders the assessments may assume a loss of about 17 percent on Greek government debt, 3 percent on Spanish bonds and none on German debt, said two people briefed on the matter who declined to be identified.

“The haircut for Greece looks a little shallow, and the particular concern is that if there is a sovereign default in Europe, it will be significantly bigger,” Nixon said.

‘Moderately Hopeful’

The banks being tested account for 65 percent of Europe’s banking industry. They include Deutsche Bank AG of Germany, France’s BNP Paribas SA and ING Bank of the Netherlands, according to the Committee of European Banking Supervisors, which is organizing the tests. The results are due to be published July 23.

Marco Annunziata, chief economist at Unicredit Group in London, said he’s “moderately hopeful” the tests will meet investors’ needs, though they may be more effective if managed at a national rather than European level.

“Within Europe, coordination usually reduces everything to the lowest common denominator,” he said.

‘Financial Backstops’

While the tests may help investors determine the capital shortfalls at European banks, the next step for European leaders is to determine how to build up banks’ buffers.

Rehn said “financial backstops” must be in place when the results are published “in case there are pockets of vulnerability.” The backstops would start with national funds and then involve a “second line” that would include the European Financial Stability Facility. European Central Bank President Jean-Claude Trichet said he favors “flexibility” on the fund, which was announced in May as part of an EU plan to aid debt-stricken nations.

“There are many national funds available that weren’t used after the big crash of 2008,” Gros said. “Of course the better answer would be to say there’s this huge pot of money, the European Financial Stability Facility, we can recapitalize any bank in Europe with that.”

That fund will be operational “without any doubt” before the end of the month, Juncker told reporters in Brussels. He also predicted that Slovakia, which has held out putting its signature on the EFSF accord, would do so by mid-July. Juncker said he had meetings scheduled later today with Slovakia’s finance minister and tomorrow with the prime minister.

Story from Business Week

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“Looking ahead, the economic and financial programme decided by the Greek government … represents a solid basis for a more positive outlook,” he said in a letter to Ioannis Tsoukalas, a member of the European Parliament.

“The programme is based on realistic macroeconomic assumptions and, in addition to the necessary expenditure cuts and tax increases, includes a very rigorous and comprehensive structural reform agenda,” Trichet said in the letter, which was published on the ECB’s Internet site.

Over the medium term, structural reforms and return to fiscal sustainability will help to support employment and renew growth in Greece, he said.

Story from Financial Mirror

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For Prime Minister George Papandreou, who commands a seven member majority in his country’s fractious parliament, the bill’s many provisions represent the beginning of end of the cradle-to-grave state compact that his father put in place in the early 1980s.

The plan was approved in principle by a vote of 159-137 late Wednesday. Individual provisions were to be voted on Thursday before a final vote on the whole package.

Three months into an historic bail program worth 110 billion euros — about $140 billion or half of Greece’s annual gross domestic product — the government has so far exceeded the deficit cutting benchmarks set by the International Monetary Fund. Government officials here see the bill’s passage as further evidence for still-skeptical international investors that Greece is committed to pushing through painful reform measures.

“This is our passport out of hell,” said Yannis Stournaras an Athens-based economist who has advised past Socialist governments. “It represents the toughest challenge for Papandreou and goes to the very heart of his party. No politician has ever been able to do this.”

Greece’s generous pension system has allowed many employees to retire before they turn 50 and earn the right to rich payouts calculated on the basis of bonus-laden salaries. The bill would unify the retirement age at 65 years of age for both men and women and would reduce payouts by calculating salaries on lifetime income as opposed to a worker’s highest, most recent pay.

It would also make it easier for Greek companies to fire workers.

Athens was to a large extent shut down Thursday as public sector workers gathered in protest before the parliament building in Syntagma square. According to police estimates, the numbers were between 5,000 and 10,000 and despite a few challenges by hooded youths carrying sticks and axes, riot police with gas masks and shields seemed to be in control of the situation.

“Nobody expected this — this is worse than the occupation under the Germans,” said Nikos Stathas, 60, a plumber who is just retiring now. He says he has just got his pension, but he is worried about his children and grandchildren. “This will demolish their retirement,” he added.

Such strong sentiments aside, by most accounts protests have been relatively restrained since three people was killed in an attack on a bank in May — a sign perhaps that Greeks, while angry and unhappy at the sacrifices forced upon them, understand that they face little other choice than to tighten their belt.

Mr. Papandreou, a life-long Socialist, has managed to keep control of his party despite protests among influential advisers like his economy minister, Louka Katseli.

A team from the I.M.F. and the European Union is due in Athens next month to examine the government’s progress, before the next 9 billion euro tranche is to be released.

Mr. Stournaras pointed out that the Greek economy performed better than expected in the first quarter, sustained by a surprisingly robust showing for private consumption, which was up by 1.5 percent.

A sharp cutback in public investment caused growth to decline by 2.5 percent for the quarter, but Mr. Stournaras expects the economy to shrink by less than the I.M.F. estimate of 4 percent and he forecasts a budget deficit this year of about 7 percent.

According to a presentation by the government’s debt management agency, sharp decreases in public sector wages and investment, plus an increase in taxes have driven the improved deficit picture.

“The government’s popularity is holding up very well,” said Paul Mylonas, chief economist at the National Bank of Greece. “But after several years of reform, adjustment fatigue may set in if light does not appear at the end of the tunnel.”

Indeed, senior government officials concede that they have yet to win back the confidence of foreign bond investors, many of whom believe that some form of a debt restructuring is inevitable, as the 10 percent-plus yields on the government’s long term debt show.

“No one in Greece is looking at a debt restructuring. It’s just not going to happen,” said Petros Christodoulou, the head of the debt management agency insisted last month at an investor conference in London.

Still, doubts abound that the economy can survive the dramatic public sector retrenchment and continue to generate needed tax revenues to make a dent in a debt that even within three years will still be at around 120 percent of G.D.P.

Story from The New York Times

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