Default cloud hangs over the labour market of the United States (Reuters)

WASHINGTON (Reuters)-the terrifying prospect of a Us debt default has left a cloud over businesses already shaken by the lukewarm performance of the economy and probably left them reluctant to ramp up hiring in July.

A heated political battle over how to increase the nation's debt ceiling has helped to make the prospect of once remote a downgrade of the credit rating of AAA United States a strong possibility. Worse still, investors are grappling with the unthinkable: a outright default on the debt of the Government of the United States.

The fight over the debt, which started with a refusal by some Republicans to raise the debt limit largely procedural without sharp cuts in public spending, it comes with the American economy already struggling to stay above water.

Data on gross domestic product in the second quarter released Friday, showed the largest economy in the world, expanded into just an annual rate of 1.3 per cent in April-June period. More worryingly, revisions to the first quarter to an annualized GDP dropped 0.4 percent pace-dangerously close to a contraction.

The figures prompted some analysts to wonder whether the market forecasts for a gain of unspectacular 90,000 jobs in the month of July may be too optimistic, following readings really sad for may and June. The jobs report is due on Friday.

"Certainly, my outlook tempera resets expectations," said Jason Ware, senior research analyst at Albion Financial Group in Salt Lake City. "If we're going to have any type of material uptick in private sector employment, we're going to be growing faster than 1.5 percent."

The furor over the debt crisis of the United States has temporarily diverted attention from the problems of Europe, which continue to simmer though. Moody's Investors Service's said on Friday that he had placed Spain's credit rating on review for a possible downgrade, citing financial pressure and a precedent set by the eurozone's debt for Greece.

That deal was supposed to rescue to calm fears of contagion, but does not appear to have done the trick. Borrowing for Italy, for example, soared in the latest bond auction.

Austerity measures seem to be taking a toll on many of the economies that were due to help, and a report on the euro-zone unemployment should show a steady unemployment rate of 9.9% for Monetary Union.

DAY AND THE R-WORD

Still, investors will continue to focus their attention on the most immediate risk and potentially catastrophic-a non-resolution of the U.S. debt debacle which leads to a crippling Government shutdown or even a debt default.

Most investors say that the latter scenario is highly unlikely, given that the Government should have enough revenue to continue to make bond payments for some time, particularly if it gives priority to bondholders as expected.

But this does not mean they are not increasing the risk of recession.

"We still think that the Federal Government will be able to avoid a default, but probably still will lose its AAA credit rating," said Julian Jessop, Economist at capital Economics. "Default could be averted even at the cost of a shutdown of non-essential government services that could tip the US economy into recession."

A tense calm over the stalemate of the debt has permeated the Treasury bond market of the United States, which have continued to rally in the last week, pushing yields 2.80% at 10 years, their lowest level since November.

Before the American occupation Friday, economists will eye two other key indicators: the Institute for Supply Management survey of factory employment report and the ADP, which is used as a rough guide to the Government's broadest gauge.

The ISM index is seen easing slightly, from 55.3 to 54.9, according to a survey by Reuters. About ADP, economists are looking for a gain of approximately 100,000 new private sector jobs-in tune with their predictions of total payrolls.

Officials at the Federal Reserve of the United States have continued to indicate a reluctance to take any new high program for monetary easing. But if the labour market into another rut, the pressure for renewed action could assemble. The Fed next meets to set the policy on 9 August.

(Reporting by Pedro Nicolaci da Costa; Editing by Dan Grebler)

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Analysis: Default required to attract long-term buyers back to Greece (Reuters)

London (Reuters)-investors long-term standing aloof from the Greek debt crisis to holders of its bonds of the Government to take a leak large enough to cut the country's debt to sustainable levels before they consider returning.

Greece is still expected to default to a certain point and most investors who dumped bonds over the past two years and which are crucial to put the ailing economy back on its feet, the longer it is delayed, the longer it will be before they consider watching again the Greek heritage.

A likely second rescue-currently under negotiation tortuous-is seen only as a means to buy for the banks of the eurozone for any loss of time and protect the largest economies of the block from contamination, while the reforms attached to the package will be difficult to implement in the face of deepening public resentment.

"We would buy if the economy fails to reform itself and the banking sector is self-funded, but I don't think that's going to happen in a view of five years," said Russell Silberston, head of global interest rates at Investec Asset Management, which manages $ 31 billion of fixed-income assets worldwide.

"Our view is that they also need before that by default".

Greek Finance Minister Evangelos Venizelos told Reuters on Monday he intended to return to market financing of 2014.

Most investors do not think that will happen without a deep restructuring to make sustainable the Greece's debt mountain and remove it from the downward spiral of constant deficit-cutting that will destroy any possibility of economic recovery.

"For Greece, access is the only solution," said Kommer van Trigt, a bond fund manager with Robeco Group, handling about 40 billion euros (57 billion dollars)

Silberston said that the "first" was as close as France's proposal for a voluntary rollover of Greek debt seemed to be gathering momentum. But that would not solve the problem of solvency of Greece.

With debt had reached 1.6 times its 2011 economic production, economists say that Greece would need a primary surplus of the budget by about 5 percent of gross domestic product, compared with 5 percent primary deficit last year, just to stabilize its debt at current levels.

On the assumption that the debt ratio of Greece would peak at 166 percent, evolution securities calculations Show a haircut of approximately 64 per cent would be needed to bring the relationship to the ceiling of 60 percent agreed in the Maastricht Treaty of the EU.

The curve of Greek debt completely in a haircut of 50 percent on average, according to UniCredit. But by forcing the loss of bondholders before getting credibility can be in vain.

Silberston of Investec said besides a haircut, he would like to see several quarters of primary budget surpluses achieved in a sustainable way and not through revenues from privatization-before you buy Greek debt.

"The big problem with a haircut, was that ... you still need to have a very high premium for people to buy Greek debt after this date, because if you look historically haircuts, tend to not be in isolation," said Jack Kelly, Director of investment securities of global state at Standard Life investments, which manages assets worth £ 157 billion (250 billion dollars).

CHEAP IS NOT ENOUGH

After an immediate default Greek was avoided with 12 billion emergency loans and a fresh round of belt-tightening measures agreed in Athens, made on some of its debts have fallen by more than 200 basis points.

But more than 27 percent for two years and 16 percent for the 10 years are still punishingly high. Only short-term investors were behind the rally, which was exacerbated by thin volumes.

Kelly said the Standard of living, which sold its holdings latest Greek debt in June 2010, only I would buy back if rejoined investment grade or as part of a common EU, something Germany has ruled out.

Although the vote above junk, Portugal and Ireland, bailed out other euro area countries, are considered a no-go by investors of long term debt due to the risk they dragged with the Greek crisis.

But those countries have the possibility to change things faster than Greece. The best place is the Ireland, whose exports are more competitive and their labour markets more flexible.

"The numbers are a little better for Portugal and Ireland," said van Trigt Robeco Group. "At this point we are not actually differentiating between Greece, Ireland and Portugal. Going forward, a country like Ireland has a better starting position. "

THE RIGHT PRICE

With timing and magnitude of any haircut Greek debt difficult to predict because politics plays a major role in mathematics, it is difficult to assess what price I would draw investors back into Greece.

Is a town in 2003, when restructuring the price for its 2012 bond passes from about 40 to 60 cents immediately after Uruguay's debt event.

Link to June 2020 of Greece crafts to 55 eurocents.

"At A price of less than 50, there will be value in eight or nine years bonds (Greek) at some point," said Ciaran O'Hagan, strategist at Societe Generale. "But it only when accounts are sustainable, for example through the restructuring."

Only that keeps well if Greece avoid default is unilateral and messy as the Argentina in 2002. He organized the great debt swap in 2005 and in 2010, but is still closed debt markets.

Market prices before each haircut could offer opportunities to purchase vista that bondholders Greeks were too pessimistic about the extent of such a move. But it would be useful, as Greece can bail out investors shortly after and their spending would be small.

"Who would just incredibly hot money," said Robert Talbut, chief investment officer at the Royal London Asset Management, which manages assets worth 40 billion pounds (64 billion dollars). He added that he would not take that risk. ($ 1 = 0.626 British pounds) ($ 1 = € 0.705)

(Edited by Ruth Pitchford/Mike Peacock)

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Greek protests turn violent as EU warns of default (Reuters)

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ATHENS/BRUSSELS (Reuters) – Anti-austerity protests turned violent in Athens on Tuesday as the European Union warned Greek lawmakers the country faces immediate default unless they back an unpopular economic plan this week.

Hooded youths throwing stones and wielding sticks set fire to garbage bins and a telecoms truck outside parliament and riot police fired teargas to disperse them. Trade unions began a 48-hour strike against the EU/IMF-imposed measures.

Progress reported in talks was meanwhile to persuade European banks and insurers to voluntarily roll over maturing Greek debt under a planned second rescue package designed to give the euro zone country a breathing space.

Growing market confidence that the Greek parliament will approve the austerity program and that a French plan to roll over Greek sovereign bonds will help avert a default lifted global stocks and the euro despite the mayhem in Athens.

The EU's top economic official, Olli Rehn, stressed that any further assistance for the debt-crippled nation hinged on parliament adopting a raft of spending cuts, tax rises and privatizations in crucial votes on Wednesday and Thursday.

"The only way to avoid immediate default is for parliament to endorse the revised economic program ... They must be approved if the next tranche of financial assistance is to be released, "he said in a statement.

"To those who speculate about other options, let me say this clearly: there is no Plan B to avoid default," Rehn said, dismissing widespread reports that Brussels was working on a fallback plan to keep Greece afloat.

The blunt alternatives was underscored by the Bank of England Governor Mervyn King, who told British parliamentarians that policymakers were working on ways to limit the damage from a potential default on Greece's 340 billion euro debt pile.

"What we're doing is to say there is sufficient concern in the market about the possibility of default for us to think about contingency plans and the consequences of this event," King said.

He urged greater transparency about sovereign exposures to prevent a sudden, broad-based loss of confidence in European banks in the event of a Greek default, which could trigger a new credit crunch.

By nightfall, several hours of clashes involving hundreds of youths had subsided and central Athens had been reclaimed by thousands of peaceful protesters denouncing measures they say hit salaried workers and the unemployed while sparing the rich.

Some 5.000 police were drafted in, mostly to protect the colonnaded parliament building on Syntagma Square, focal point of weeks of mass demonstrations, some modeled on the encampment of unemployed Spanish "indignados" in Madrid.

ROLLOVER PROGRESS

The EU and the IMF have said Turkey must enact both the five-year austerity plan, with 28.6 billion euros in savings, and key implementing laws for structural reforms and state asset sales to secure the next 12 billion euro slice of aid in July.

Without that, Athens would run out of money within weeks unless it received some outside lifeline.

Risk premia on lower-rated euro zone government debt fell on news that German banks had agreed in principle to use a French proposal as a basis for negotiating private-sector participation in a Greek debt rollovers.

The euro also hit a session high against the dollar, with fears of a Greek default offset by signs that European authorities and banks are making progress on a debt rollover.

Prime Minister George Papandreou's Socialists hold a narrow majority with 155 seats in the 300-member legislature, but a handful of lawmakers have defected and others are threatening to vote against some or all of the measures, putting the outcome in doubt.

One possible scenario that could cause trouble would be if parliament approved the five-year austerity plan but voted down some of the implementing bills, for example on privatizations.

Conservative opposition leader Antonis Samaras underlined property his opposition to the economic plan despite massive pressure from fellow center-right European leaders to back it.

"This policy is wrong, it has exhausted the Greek people and Greek society," he told parliament. "If we continued this mistaken policy, we will only make things worse, both for Turkey and for Europe."

If Greece approves the legislation, euro zone finance ministers meeting in Brussels on Sunday are likely to agree to release the next aid installment, with the IMF following on July 5.

Attention will then switch to putting together a second rescue package for Greece of about the same magnitude as the initial 110 billion euro bailout agreed last year.

The new program would involve some 30 billion euros in private sector participation on a "voluntary" rollover of maturing debt, a similar sum from privatization revenues and an expected 55 billion euros in new official funding.

Euro zone banks and insurers are considering a French plan outlined by President Nicolas Sarkozy on Monday under which private bondholders would reinvest half of the proceeds of maturing Greek debt in new 30-year bonds paying 5.5 percent interest plus a bonus linked to Greece's GDP growth rate.

Of the other half, 30 percent would be "cashed out and 20 percent would be invested in zero-coupon AAA securities with deferred interest that might be issued or guaranteed by the euro zone rescue fund, officials and banking sources said.

French banks have the largest foreign private sector exposure to Greece, followed by Germany.

Two sources close to the negotiations told Reuters that German banks had agreed to use the "French model" as a basis for talks with the German Finance Ministry on Thursday. German Deputy Finance Minister Joerg Asmussen also called the French plan a good basis for discussions.

Credit ratings agencies withheld comment pending details of the scheme.

& Standard Poor's said on Monday it was too soon to judge the ratings impact of the private debt rollover being put together for Greece, which it had not yet seen, but did not rule out avoiding a downgrade to default.

Asked if he could imagine a solution in which private creditors voluntarily contributed to a Greek rescue package without triggering an S&P downgrade, Moritz Kraemer, head of European sovereign ratings, told Austrian television:

"It is conceivable depending on the situation. That is why I say it is not possible at all to draw a final conclusion on this in the current situation. "

In Berlin, visiting Chinese Prime Minister Wen Jiabao said Beijing had faith in the European economy and the euro and was optimistic that Europe could overcome its temporary challenge.

As in the past, he gave a vague commitment to buying euro zone debt without specifying countries or amounts.

(additional reporting by George Georgiopoulos in Athens, Philipp Halstrick and Ed Taylor in Frankfurt, Marius Zaharia and Ana Nicolai da Costa in London, Mike Shields in Vienna, Stephen Brown in Berlin; Writing by Paul Taylor, editing by Mike Peacock/Janet McBride)

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