New debt fears rock Greece, Iceland

Greek officials vehemently denied reports Tuesday that the country was seeking to renegotiate a rescue plan hammered out last month for the debt-saddled nation.

Earlier in the day, multiple media reports suggesting Athens was trying desperately to avoid IMF participation in its salvage plan caused Greek borrowing costs to shoot up from already high levels and led Finance Minister George Papaconstantinou to pour cold water on the story.

"There was never any action by our country to change the terms of the recent agreement," the minister said in a statement.

Under the original agreement reached in Brussels on March 25, Greece would receive bilateral loans from eurozone countries and the International Monetary Fund to avoid default.

Athens has repeatedly said it hopes never to have to use the rescue plan, but that its existence would restore market confidence and reduce the cost of borrowing on international markets.

Rumours that the deal was dyingcaused the spread between Greek 10-year bonds and equivalent German issues to surge to 406 basis points Tuesday afternoon from about 340 points Tuesday morning.

They have since narrowed to 384.5 basis points after Greek officials worked hard to buttress the deal's viability all day Tuesday.

"The agreement is important for both Europe and Greece, because it determines the conditions under which a country will be supported under specific terms by its partners," Papaconstantinou said. "But as we have repeatedly said, Greece has not asked for this mechanism to be activated."

On Wednesday, inspectors from the IMF are due in Athens to review progress in government austerity cuts. Greece has promised draconian fiscal reforms to reduce debt but remains under pressure from high borrowing costs.

Greece must borrow the equivalent of $72 billion US this year, but has so far raised less than half of that amount on the international markets. It needs to roll over some $27 billion US of that in April and May alone.

Iceland rating downgraded

Greece was not the only European nation rocked with new debt worries Tuesday, as ratings agency Moody's Investor Service downgraded Iceland's outlook to negative from stable.

For months, the tiny nation has been trying to settle the so-called Icesave dispute the repayment of $5.3 billion to governments in Britain and the Netherlands to compensate government payments to citizens with accounts in a collapsed Icelandic bank.

In a referendum last month Icelanders voted overwhelmingly to simply walk away from the obligations and not pay their foreign debts, something the Icelandic government has thus far been unwilling to do.

The possibility remains remote, but such a move would virtually eliminate Iceland's ability to tap the foreign credit it needs to stay afloat, which led to the Moody's downgrade

Icelandic Prime Minister Johanna Sigurdardottir last month pressed the International Monetary Fund to hasten a review to determine the next batch of bailout funding for the nation's struggling economy.

The IMF has been putting off a decision on whether to release the second tranche of its $2.1 billion bailout funds since last year. Iceland is worried that the money could be held up until it settles the wrangling with Britain and the Netherlands, although the IMF has insisted this wasn't the case.