Norway suspect's lawyer warns gunman may be 'insane' (AFP)

OSLO (AFP) – The lawyer for the Norwegian gunman who has claimed responsibility for killing 76 people in twin attacks last week said Tuesday that everything about his client's case indicates he is "insane".

"This whole case indicates that he's insane," Geir Lippestad told journalists of Anders Behring Breivik, adding that a medical evaluation would take place to establish his psychiatric condition.

"He believes that he's in a war and he believes that when you're in a war you can do things like that without pleading guilty," the lawyer said of the 32-year-old Norwegian who claims to be trying to bring about an anti-Muslim revolution.

Asked about the implications of his client being adjudged medically insane after blowing up the government centre in Oslo and shooting dead 68 people on a nearby island, Lippestad said: "He can't be punished in a jail."

Also Tuesday, Norwegian authorities indicated they may charge the suspect with crimes against humanity as the government rose to the defence of police following criticism of the response to the island shooting spree.

Lippestad, appearing to pave the way for a defence that could see his client escape prison, after medical experts acceptable to the prosecution are found, said Behring Breivik "has a view on reality that is very, very difficult to explain."

He said his client used unspecified drugs to make himself "strong, efficient, to keep him awake" going into Friday's rampage.

"He thought he'd be killed after the bombing, after the action on the island, and he also thought he'd be killed at trial," Lippestad said.

In fact, "he was a little bit surprised that he succeeded, that in his mind he succeeded," Lippestad added.

Asked whether Behring Breivik had shown any empathy for his mainly young victims, Lippestad said: "No."

Behring Breivik wrote and published a 1,500-page manifesto immediately before starting his bombing and shooting spree.

"He believes this war will continue for 60 years and in 60 years this war will be won," Lippestad said of the events he believes he has triggered, preparations for which are painstakingly chronicled in the tract.

In Oslo, the head of the Labour Party's youth movement vowed to restore its summer camp on the island.

"We are sending a clear message: we are going to reclaim the island," party youth leader Eskil Andersen said.

A Norwegian businessman already having pledged around 600,000 euros (870,000 dollars) to redevelop the island, 40 kilometres (25 miles) northwest of Oslo.

Authorities said earlier they were considering charging Behring Breivik with crimes against humanity over the massacre in Norway as the government leapt to the defence of the police over its handling of the tragedy.

Faced with the worst crimes on its territory since World War II, many in Norway have been dismayed by the prospect that the perpetrator could serve just 21 years behind bars -- the maximum sentence allowed for the terrorism charges that Behring Breivik currently faces.

But prosecutor Christian Hatlo told the Aftenposten newspaper that police are now envisaging charging him with crimes against humanity for the bombing of Oslo's government district and a shooting bloodbath on a nearby island.

"Police have so far cited... the law on terrorism but seeking other charges has not been excluded," police spokesman Sturla Henreiksboe told AFP.

"No final decision has yet been taken," he said.

Behring Breivik admitted carrying out the attacks at his first court appearance on Monday when he was remanded in custody for eight weeks.

He says he was on a Crusade to save Norway and Western Europe from a Muslim invasion and that the attacks targeting the Labour Party-led government and its youth wing were "cruel" but "necessary".

Police said they would start releasing the names of those killed, many of them children, at 6.00 pm (1600 GMT) on Tuesday.

The police have come in for heavy criticism over the time it took them to reach Utoeya island where Behring Breivik shot dead 68 of his victims in a spree that lasted around 90 minutes.

It also emerged on Monday that police investigated Behring Breivik in March for a purchase of chemicals, but the probe was dropped.

In a press conference on Tuesday, Norway's Justice Minister Knut Storberget rejected criticism of a delay in police getting to the Utoeya island, saying the force had "delivered extremely well" with "fantastic" work.

The manifesto saw Behring Breivik boast that he was one of up to 80 "solo martyr cells" recruited across Western Europe to topple governments tolerant of Islam.

Police are probing his claim that he is part of a network with more active cells.

Lippestad said that one of the reasons Behring Breivik's first court appearance on Monday was behind closed doors was for fear he would send coded signals to other cells.

His client was disappointed that the hearing was not open to the public, Lippestad added.

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IMF chief warns of global dangers of US default (AFP)

WASHINGTON (AFP) – IMF chief Christine Lagarde warned Tuesday the clock was ticking on a US debt deal, as the dollar slid to new lows amid concerns of a looming and unprecedented default by the world's top economy.

With a week to go before the United States hits an August 2 deadline when the government runs out of funds to pay its bills, Congress remained deeply divided on raising the $14.3 trillion debt ceiling.

In a solemn late night address to the nation on Monday, Democratic President Barack Obama hit out at what he called a "dangerous game" being played by rival Republicans.

"We can't allow the American people to become collateral damage to Washington's political warfare," Obama said, warning of a "deep economic crisis" if the United States, still emerging from recession, defaults.

But Republican House Speaker John Boehner Tuesday insisted: "We have a bill that is a reasonable approach -- we've negotiated with the Senate leadership -- that really is common sense."

Republicans have said they will only agree to raising the debt limit if there are accompanying measures to rein in the ballooning US deficit.

Obama has agreed to a raft of deep spending cuts, but Republicans emboldened by newly elected arch-conservative Tea Party lawmakers have refused his demand for matching revenue increases to be imposed on the rich and big corporations.

Lagarde, the new head of the International Monetary Fund, waded into the debate Tuesday urging the two sides to find a compromise.

"The clock is irremediably ticking, and people really have to find a solution," she said in New York.

She warned a default "would be a very, very, very serious event. Not for the United States alone, but for the global economy at large."

According to the IMF, US public debt will reach 99 percent of its GDP in 2011 and 103 percent in 2012.

World markets wobbled again as global fears spread of no end to the stalemate before next Tuesday's deadline.

US stocks fell, with the Dow Jones Industrial Average down 64 points (0.52 percent) at midday.

European equities also dropped while the dollar slid against the euro and yen, hitting an all-time low against the safe-haven Swiss franc.

"The foreign exchange market seems to be losing faith that the US Congress will reach an agreement... This has caused a sell-off in the dollar across the board," said Kathleen Brooks, an analyst at trading group Forex.com.

Boehner has proposed a two-step plan with debt increases first to February or March 2012, and later to 2013.

And Republican House Majority Leader Eric Cantor called on the party "to stop grumbling and whining and to come together as conservatives and rally behind the speaker and call the president's bluff," a Republican source said.

But Obama has rejected the idea of a temporary debt limit increase, arguing it would leave the underlying problem unresolved and risk repeating the current crisis in six months' time.

Obama has warned of "Armageddon" if the United States defaults on its debt repayments for the first time in history, which could see the US lose its coveted AAA debt rating status and plunge the global economy back into turmoil.

Washington hit its debt ceiling on May 16 but has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating normally.

The United States, still recovering from the 2008 recession with unemployment hovering around 9.2 percent, would be faced with tough choices -- meeting either its debt obligations, or reneging on government checks to the poorest, most vulnerable Americans.

The political stakes are also high ahead of the November 2012 elections, and Obama appealed to Americans to "make your voice heard" to members of Congress.

Reports suggested many had heeded the call and that some congressional websites had crashed and the Congress switchboard was flooded with calls.

There are signs the standoff is exacting a political toll on both the president and Republicans ahead of next year's White House race.

Washington Post/ABC television poll showed weakening support for Obama's economic agenda, and found the percentage of people who said he has made the economy worse has jumped six points since October to 37 percent.

But about as many people blamed Republican policies with 65 percent disapproving of the GOP's handling of jobs compared to 52 percent for the president.

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Moody's warns Greek default almost certain (Reuters)

By Ingrid Melander and George Georgiopoulos Ingrid Melander And George Georgiopoulos – 2?hrs?22?mins?ago

ATHENS (Reuters) – Moody's cut Greece's credit rating further into junk territory on Monday and said it was almost certain to slap a default tag on its debt as a result of a new EU rescue package.

It was the second rating agency to warn of a default after euro zone leaders and banks agreed last week that the private sector would shoulder part of the burden of a rescue deal that offers Greece more cash and easier loan terms to keep it afloat and avoid further contagion.

"The announced EU program along with the Institute of International Finance's statement implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100 percent," Moody's said in a statement.

Bank lobby IIF, which led private sector negotiations, aims to attract 90 percent investor participation in the bond exchange plan which comes on top of the EU's new 109 billion euro bailout.

Moody's cut Greece's rating by three notches to Ca, just one notch above default, to reflect the expected loss implied by the proposed debt exchanges.

Greece now has the lowest rating of any country in the world covered by Moody's, which, like Fitch last week, said it would review Greece's rating after the debt swap is completed.

"Once the distressed exchange has been completed, Moody's will reassess Greece's rating to ensure that it reflects the risk associated with the country's new credit profile, including the potential for further debt restructurings," it said.

However, whereas Fitch pledged to quickly give Greece a higher, "low speculative grade" after its bonds had been exchanged, Moody's said it could not forecast when the rating would change or how.

"It all depends how quickly the debt exchange takes place," said Alastair Wilson, Moody's Managing Director for EMEA Credit Policy. "Once we have greater visibility over that, we will reassess the credit profile quite quickly. Whether the rating will change, that's a different question," he told Reuters.

A senior EU official said on Saturday that the aim was to start a voluntary swap of privately-held Greek bonds in late August and conclude it in early September.

Greek bank shares and the broader stock market were unfazed by Moody's action. Analysts said the downgrade and the default warning were priced in and less worrying following assurances provided by the EU deal.

"The EU Council last week effectively secured Greek banks' continued access to ECB liquidity, even in the case that PSI (private sector involvement) triggers a selective default," said Platon Monokroussos, an economist at EFG Eurobank.

The government has repeatedly criticized ratings firms for their downgrades and its spokesman threatened on Monday to end its subscriptions to these agencies as the new rescue package means Greece will not issue new bonds for years.

"All governments pay a subscription to these agencies. We, I think, do not need the reviews anymore. They have no practical value," Elias Mosialos told Radio 9. "Perhaps the finance ministry should end its subscription."

CONTAGION CONTAINED ... FOR NOW

Moody's said it would take into account the possibility of a second default while reassessing Greece's rating.

"Our experience is that relatively small restructurings have often been followed by deeper defaults," Wilson said, adding that he could not say if this would be the case for Greece.

The rescue package for Greece benefits other euro zone countries by containing near-term contagion risks but it was not necessarily positive in the longer run as it set a precedent for private sector involvement in rescue deals, Moody's said.

"The support package sets a precedent for future restructurings should the finances of another euro area sovereign become as problematic as those of Greece. The impact of Thursday's announcement for creditors of Ireland and Portugal is therefore likely to be credit-neutral," it said.

The cost of insuring most peripheral euro zone government debt against default rose on Monday on market doubts that the fresh aid package for Greece agreed last week will protect bigger economies from contagion.

Standard & Poor's and Fitch rate Greece CCC, broadly in line with Moody's rating. S&P has not yet said how the EU summit deal will affect Greece's rating.

(Additional reporting by Cecile Lefort in Sydney; Writing by Ingrid Melander, editing by Mike Peacock)

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EU warns of economic damage if Greece summit fails (Reuters)

BRUSSELS/FRANKFURT (Reuters) – EU leaders must find a convincing solution to Greece's debt crisis at a summit on Thursday or the global economy will pay the price, the head of the European Commission said in an unusually somber warning.

Jose Manuel Barroso delivered the message as officials of the 17-nation currency area and bankers struggled to pin down a package of measures to persuade markets Greece can be saved from default and the rest of the euro zone from contagion.

"Nobody should be under any illusion: the situation is very serious. It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond," Barroso told a news conference.

He said the elements of a solution must include: measures to ensure the sustainability of Greek public finances, private sector involvement in funding for Athens, more flexible use of the euro zone's EFSF bailout fund, repair of the region's banking system and liquidity to keep the economy going.

In what sounded like veiled criticism of German Chancellor Angela Merkel, Europe's reluctant paymaster, Barroso said it was time for leaders to say "what they can do and what they want to do. Not what they can't do and won't do."

Merkel lowered expectations on Tuesday, saying the summit would not bring a spectacular one-shot solution to the Greek crisis but only the latest in a series of incremental steps to tackle the roots of Athens' debt and competitiveness problems.

Christine Lagarde will attend the summit on behalf of the International Monetary Fund, which has told euro zone leaders that they should put more money into the EFSF bailout fund and allow it to buy government bonds on the secondary market.

The euro and peripheral euro zone bonds rose on hopes that policymakers would heed the IMF's advice on bond purchases and provide precautionary credit lines to countries in difficulty.

BANKS' PROPOSAL

However, Germany has so far blocked either course, and while a source close to the talks told Reuters earlier this week that both ideas were back on the table, there is no sign yet that Berlin has changed its mind.

Both would require changes in the EFSF's rules that would have to be ratified by national parliaments, and could fall foul of skeptics in Germany, the Netherlands and Finland.

They would also run counter to a treaty signed just three weeks ago creating a permanent crisis-resolution mechanism from 2013, the ESM, which would not have such powers.

Major European banks and insurers were to send euro zone governments a complex proposal later on Wednesday for helping in a planned 115 billion euro second Greek bailout, industry sources said.

One banking source said the banks were offering a mixture of debt rollovers, maturity extensions and other measures worth roughly 40 billion euros over three years, but details have yet to be finalized.

Another source said negotiations were still fluid but key elements would be a large rollover of expiring bonds for up to 30 years on credit-enhanced terms, and probably a much smaller buyback by the Greek government of its own bonds on the secondary market with money lent by the EFSF.

Those options would almost certainly prompt credit ratings agencies to declare a selective default, putting the European Central Bank in an acute dilemma as to whether to carry out a threat to reject Greek bonds as collateral -- a move that would starve Greek banks of vital liquidity.

The banks are determined to fight a proposal for a tax on the financial sector to help pay for a second Greek rescue, which a euro zone working paper obtained by Reuters on Tuesday showed was seen as the least risky private sector contribution.

A senior EU source said governments seemed to be converging around the tax proposal despite its drawbacks.

"We're heading for another sticking plaster deal," he said. "We're in a crisis and there's panic. Sometimes panic can lead to action, but it can also lead to paralysis, and in this case it's more about paralysis."

Banking sources said a tax would unfairly penalize banks with no exposure to Greek debt and would inevitably give rise to legal challenges.

"GERMAN RETICENCE"

Merkel and French President Nicolas Sarkozy, who conferred by telephone on Tuesday, met in Berlin on Wednesday evening for what could be the decisive preparatory session before euro zone officials start thrashing out details on Thursday morning, just hours before the summit, which could run late into the night.

There were no plans for Merkel and Sarkozy to talk to reporters, officials said.

"We are very confident that there will be a good and sensible solution," Merkel's spokesman said, stressing private sector participation remained a key German priority.

French Foreign Minister Alain Juppe also said he was "sure we will find an accord," adding that contrary to media reports, "there is a very broad convergence of views" among euro zone capitals.

However, Paris signaled apparent frustration at Berlin's continued opposition to common euro zone bonds, a step which European Socialist leaders and many economists argue would provide a long-term solution to the debt crisis.

French government spokeswoman Valerie Pecresse said after a cabinet meeting that "German reticence" was the main obstacle to the idea of issuing joint euro bonds.

Despite Wednesday's cautious market optimism, many analysts fear the fifth European summit this year will produce half-measures that, at most, will buy a couple of months before pressure for a Greek debt restructuring becomes acute again.

"(The) summit could provide the last chance for euro-zone policymakers to get a grip on the region's debt crisis," Capital Economics said in its daily market note.

"Anything other than a very decisive response could see the situation become irretrievable."

The ECB kept up a drumbeat of pressure on euro zone leaders to avoid any step that could cause a selective Greek default.

ECB chief economist Juergen Stark said in a newspaper he hoped the leaders would stick to a previous commitment to avoid a selective default, because anything else would confuse markets.

(Additional reporting by Alex Chambers, Jessica Mortimer and Kirsten Donovan in London, Andreas Rinke and Stephen Brown in Berlin, Nick Vinocur in Paris; writing by Paul Taylor; editing by Janet McBride)

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Lawmakers snipe, Bernanke warns as deadline nears (AP)

By JIM KUHNHENN and NANCY BENAC, Associated Press Jim Kuhnhenn And Nancy Benac, Associated Press – 30?mins?ago

WASHINGTON – Fuming lawmakers pointed fingers at one another and President Barack Obama on Thursday as negotiations over raising the national debt limit entered a perilous endgame. Federal Reserve Chairman Ben Bernanke warned of economic damage, and an anxious Wall Street envisioned catastrophe if the U.S. defaulted on its obligations.

Obama and congressional leaders were meeting again late in the day at the White House. But the president's blunt declaration that "enough is enough" as the previous evening's talks ended did nothing to quell the rancor as a new day of positioning and posturing played out.

Senate Majority Leader Harry Reid stood on the Senate floor Thursday and sniped that House Majority Leader Eric Cantor shouldn't even be part of the talks anymore, noting that the Virginia Republican has been called "childish." Not long after, Senate Republican Leader Mitch McConnell stood to serve notice that the debt problem belonged squarely in Obama's lap.

"Republicans will not be reduced to being the tax collectors for the Obama economy," McConnell said. "Don't expect any more cover from Republicans on it than you got on health care. None."

Federal Reserve Chairman Ben Bernanke, testifying on Capitol Hill, warned legislators that failing to raise the debt limit in time to avoid default would only end up increasing the federal deficit, calling that a "self-inflicted" wound.

He said default would drive up interest costs on the $14.3 trillion debt and reduce government revenues by slowing economic growth.

None of the back-and-forth was a promising prelude to negotiations scheduled to resume at the White House, less than three weeks before an Aug. 2 deadline for increasing the government's borrowing authority. Thursday's talks were to focus on the touchy matters of how to cut spending on Medicare and Medicaid and raise more tax revenue.

Behind the scenes, meanwhile, legislators and White House officials continued to work on a backup plan offered by McConnell.

Obama is demanding that budget negotiators find common ground by week's end, as the financial world watches with growing jitters.

"No one can tell me with certainty that a U.S. default wouldn't cause catastrophe and wouldn't severely damage the U.S. or global economy," Jamie Dimon, CEO of JPMorgan Chase & Co., told reporters Thursday. "And it would be irresponsible to take that chance."

Already, Moody's Investors Service is reviewing the government's credit rating, saying there is a small but rising risk that it will default on its debt. If Moody's were to lower the rating, the consequences could ripple through the economy, pushing up rates for mortgages, car loans and other debts. A Chinese rating agency, Dagong Global Credit Rating Co., also warned of a possible downgrade.

Reid sketched the potential consequences of default in dire terms, saying Social Security checks, veterans' benefits and paychecks for troops would stop. "Millions of Americans could lose their jobs," he added.

A Reid spokesman later clarified that Social Security benefits "could" stop, as Obama previously had warned, but it wouldn't be a certainty.

Republicans have called such statements scare tactics.

In the cauldron of the White House Cabinet Room, Obama and top lawmakers bargained for nearly two hours late Wednesday. Obama curtly ended the session when Cantor, R-Va., urged him to accept a short, monthslong increase in debt instead of one that would last through next year's presidential election.

"Enough is enough. ... I'll see you all tomorrow," Obama said, rising from the negotiating table and leaving the room, according to several officials familiar with the session.

Reid said that while other Republican leaders were willing to negotiate in good faith, Cantor "has shown he shouldn't even be at the table."

The United States hit its current $14.3 trillion debt ceiling in May and the Obama administration says the government will default on its obligations if the debt limit is not increased by Aug. 2. For a new debt ceiling to last to the end of 2012 would require raising it by about $2.4 trillion.

Republicans, in control of the House of Representatives in part because of the support of tea party activists, say they will not vote to raise the limit if Obama doesn't agree to at least an equal amount of deficit reductions over 10 years.

Obama and the top eight House and Senate leaders met for the fourth time in as many days Wednesday, and, despite the tense ending, agreed to meet again Thursday.

A congressional aide said the White House discussed with lawmakers the possibility of moving talks this weekend to the presidential retreat at Camp David in Maryland. But a spokesman for House Speaker John Boehner said the Ohio Republican told the White House he saw no need for that. And Obama aides later said they planned to continue holding meetings at the White House for the next few days.

Despite McConnell's assertions that the debt problem belongs to Obama, fresh polling from Quinnipiac University suggested voters would be more apt to hold Republicans responsible than Obama, by 48 percent to 34 percent, if the debt limit is not raised. The same survey showed voters were about evenly split on whether they're more concerned about raising the limit and increasing government debt, or seeing the government go into default and damaging the economy.

"The American people aren't very happy about their leaders, but President Barack Obama is viewed as the best of the worst, especially when it comes to the economy," said Peter Brown, assistant director of Quinnipiac's Polling Institute.

That helps explain why McConnell put forward a plan that would give Obama new powers to overcome Republican opposition to raising the debt ceiling.

The proposal would place the burden on Obama to win debt ceiling increases up to three times, provided he was able to override congressional vetoes — a threshold Obama could manage to overcome even without a single Republican vote and without massive spending cuts. Conservatives promptly criticized the plan for giving up the leverage to reduce deficits. But the plan raised the prospect of combining it with some of the spending cuts already identified by the White House in order to win support from conservatives in the House.

In an interview with radio talk-show host Laura Ingraham, McConnell described his plan in stark political terms, warning fellow conservatives that failure to raise the debt limit would probably ensure Obama's re-election in 2012. He predicted that a default would allow Obama to argue that Republicans were making the economy worse.

"You know, it's an argument he has a good chance of winning, and all of a sudden we (Republicans) have co-ownership of a bad economy," McConnell said. "That's a very bad positioning going into an election."

Sen. Charles Schumer, D-N.Y., said that while the president and other Democrats would still prefer a larger agreement, McConnell's plan was an acceptable option — especially if some consensus spending cuts were added. He said McConnell and Reid were discussing the idea.

Democratic officials said that even as Obama confronted Cantor and Boehner in Wednesday's meeting, he commended McConnell.

"Sen. McConnell at least has put forth a proposal," a Democratic official quoted the president as saying. "It doesn't reduce the deficit and that's what we have to do. It just deals with the debt limit. Now Sen. McConnell wants me to wear the jacket for that."

The officials said Obama went on to say they all had a responsibility to find a compromise.

____

Associated Press writers Dave Espo, Laurie Kellman, Ben Feller, Julie Pace, Martin Crutsinger and Erica Werner in Washington and Pallavi Gogoi in New York contributed to this report.

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Moody's cuts Portugal to junk, warns on 2nd bailout (Reuters)

LISBON/NEW YORK (Reuters) – Moody's on Tuesday cut Portugal's credit standing to junk in the first such move by a ratings agency and warned the country may well need a second round of rescue funds before it can return to capital markets.

Moody's Investors Service slashed Portugal's credit rating by four levels, to Ba2, causing the debt-laden Iberian country to follow Greece into junk territory below investment grade. Greece is rated much lower, at Caa1.

Portugal in April became the third euro zone country to request a bailout, after Greece and Ireland.

Moody's cited heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilization targets set out in its loan agreement with the European Union and International Monetary Fund.

Portugal is receiving funds from a three-year, 78-billion-euro ($112 billion) EU/IMF bailout program and does not need to issue long-term debt in the market until 2013.

But Moody's said there is an increasing probability Portugal will not be able to borrow at sustainable rates in capital markets in the second half of 2013 and for some time thereafter.

There was a "growing risk that Portugal will require a second round of official financing before it can return to the private market, Moody's said, and the increasing possibility that private sector creditor participation will be required as a pre-condition."

It also said Portugal faced formidable challenges in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.

Of the three major ratings agencies, Standard & Poor's and Fitch Ratings both have Portugal at BBB-minus, the bottom of the investment grade range.

Portugal's new center-right government said in a statement that Moody's did not take into account strong political backing for austerity after a June 5 election, and an extraordinary tax announced last week.

Unlike the previous minority Socialist government, the new ruling coalition has a comfortable majority in parliament to pass austerity measures and reforms. It did acknowledge, though, that the rating cut "shows the vulnerability of the country's economy amid a debt crisis."

It also reaffirmed commitment to deepening and speeding up austerity measures that the country vowed to implement under its bailout pact, saying a strong macroeconomic adjustment was "the only way to reverse the course and restore confidence."

The country has to slash its budget deficit to 5.9 percent of gross domestic product this year after overshooting its target last year, when the gap was 9.2 percent, and then reduce it to 3 percent by the end of 2013.

Anthony Thomas, Moody's analyst for Portugal, told Reuters "evidence that Portugal is meeting or indeed exceeding its deficit reduction targets" could be a positive that may lead the agency to change its outlook on the country's credit rating to stable from negative.

But he also said the outlook depends a great deal on whether euro zone officials will require private sector participation when extending new financing to the region's troubled countries. Right now, such participation is planned to be only voluntary so as not to cause ratings agencies declaring it a "credit event."

Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto, said Moody's move was "a bit extreme" and was likely to exacerbate concerns over Portugal's debt.

"The capacity to return to the markets after a while depends on a more global, structural solution by Europe rather than on what each troubled country does. I think it's too early to think of a second bailout for Portugal right now, not this year at least," he said.

Garcia said the ratings agencies were not taking into account the European Union's political determination to avoid a euro zone member's default, despite the union's strong support for Greece, which is in a far worse shape than Portugal.

"Either they don't believe in the power of the political will by the European Union to avoid default, or they are underestimating this political union," he said.

Robert Tipp, chief investment strategist at Prudential Fixed Income in New Jersey, said the downgrade showed the European debt crisis was unlikely to stop at Greece, which looks set to receive a second bailout.

"Once Greece gets wrapped up, you move on to the next country, and in all likelihood that will be the shape of things to come over the next year or two in the euro zone until the long-term financing trajectory for these countries gets stabilized," he said.

In practical terms, Portugal may have to pay a higher premium to place up to 1 billion euros in 3-month Treasury bills in an auction on Wednesday due to the downgrade.

"It'll probably make the yield a bit worse, but I don't expect anything major, because when you go to the market now you have to have the issue booked in advance," Garcia said. Portugal has opted to stay in the T-bill market after the bailout.

(Additional reporting by Daniel Bases in New York and Sergio Goncalves in Lisbon; Editing by Dan Grebler)

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Obama warns against short-term deal on debt limit (AP)

WASHINGTON – President Barack Obama prodded Congress Tuesday to make a deal within the next two weeks on raising the nation's borrowing limit, and he said he was summoning leaders of both parties to the White House this week to try to get it done.

Obama said he opposed any effort to "kick the can down the road" with a short-term increase, as suggested by some lawmakers — though he stopped short of ruling that out. He reiterated his position that any deal must include not only spending cuts but also new revenue — tax increases already ruled out by Republicans.

"We need to come together over the next two weeks to reach a deal that reduces the deficit and upholds the full faith and credit of the United States government and the credit of the American people," Obama said at the White House.

"We've made progress, and I believe that greater progress is within sight, but I don't what to fool anybody — we still have to work through real differences," the president said.

He said congressional leaders were being invited to meet Thursday at the White House.

Obama spoke as the Aug. 2 deadline for raising the nation's borrowing limit came closer. Experts say lawmakers must waste no time in making a deal if they are to have any chance of getting it finalized and passed through both chambers of Congress in time.

Despite the president's optimism, it remained unclear where compromise could be found. Republicans are insisting they will note vote to raise the debt limit without major spending cuts; Democrats are refusing to sign off on cuts of such magnitude without at least some tax increases as well. Republicans say they won't sign off on any tax hikes at all, including those Obama wants targeting the wealthiest Americans or closing loopholes to corporations.

The administration says that if the government's borrowing limit is not increased by Aug. 2, the U.S. will face its first default ever, potentially throwing financial markets into turmoil.

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Euro zone warns Greeks on sovereignty and privatization (Reuters)

BRUSSELS/BERLIN (Reuters) – Euro zone finance ministers have approved a 12 billion euro ($17.4 billion) installment of Greece's bailout, but signaled that the nation must expect significant losses of sovereignty and jobs.

Ministers in the Eurogroup gave the go-ahead for the fifth tranche of Greece's 110-billion-euro financial rescue agreed last year, and said details of a second aid package for Athens would be finalized by mid-September.

But within hours of Saturday's decision, Eurogroup chairman Jean-Claude Juncker warned Greeks that help from the EU and International Monetary Fund would have unpleasant consequences.

"The sovereignty of Greece will be massively limited," he told Germany's Focus magazine in the interview released on Sunday, adding that teams of experts from around the euro zone would be heading to Athens.

"One cannot be allowed to insult the Greeks. But one has to help them. They have said they are ready to accept expertise from the euro zone," Juncker said.

Greeks are acutely sensitive to any infringement of their sovereignty and any suggestion that foreign "commissars" might become involved in running the country is an incendiary political issue and could trigger more street protests.

After Saturday's conference call on Saturday, the 17 euro zone ministers agreed the fifth tranche would be paid by July 15, as long as the IMF's board signed off on the disbursement. The IMF is expected to meet on July 8 to approve it.

The payment will allow Greece to avoid the immediate threat of debt default, but the country still needs the second rescue package, which is also expected to total around 110 billion.

Between now and then, finance ministers will work on the "precise modalities and scale" of private creditors' involvement.

Germany hopes this will eventually total around 30 billion euros, with banks voluntarily buying new Greek bonds when old ones they hold mature, meaning Athens would not have to produce cash to repay its creditors immediately.

Juncker also said Greece must privatize on a scale similar to the sell off of East German firms in the 1990s.

"For the forthcoming wave of privatizations they will need, for example, a solution based on a model of Germany's 'Treuhand agency'," Juncker said, referring to the privatization agency that sold off 14,000 East German firms between 1990 and 1994.

BITTER EXPERIENCE

Greece's problems with a lack of economic competitiveness are modest compared with those of eastern Germany, which more than 20 years after communism still has high unemployment.

Juncker made no explicit reference to job losses. But any repeat of Germany's Treuhand experience may prove bitter for Greeks, who are already suffering soaring unemployment as a recession drags into its third year.

Treuhand was supposed to sell state property at a profit but closed with a huge deficit and a legacy of bitterness among the legions of workers whose jobs it destroyed. Four million Germans were employed by Treuhand-owned companies in 1990 but only about 1.5 million jobs were left by 1994.

The Greek parliament voted on Thursday to set up a privatization agency under austerity plans agreed with the European Union and IMF which have provoked violent protests on the streets of Athens.

Athens must sell off 5 billion euros in state assets this year alone or risk missing targets set under its EU/IMF program, which could cut off its funding needed to keep the government running and avoid a debt default.

"The current package of measures, which Athens has agreed to, will bring a solution to the Greek question," said Juncker. However, he added that the Greek tax collection system was "not fully functional."

Athens has repeatedly failed to meet budget targets laid down in the first bailout program, raising the risk that the crisis will spread across the euro zone if unresolved.

"What is crucial now is to implement parliament's decisions," Greek Finance Minister Evangelos Venizelos said shortly after the Eurogroup decision.

The decision gives Athens breathing but concern is growing among EU officials that the strictures being imposed on Greece, including 28 billion euros of austerity measures between now and 2015, are too harsh and could cause longer-term damage.

Financial markets still see an 81 percent chance that Greece will eventually default, and German Finance Minister Wolfgang Schaeuble told Der Spiegel in an interview that Berlin was making preparations for such an event -- even though it does not expect it to happen.

Private financial institutions have held talks with finance ministry and central bank officials in euro zone countries to discuss under what conditions the private sector would be willing to help finance Greece and by how much.

Those discussions continue, with the involvement of the private sector in the next package a must for several euro zone countries as voters grow increasingly opposed to shouldering the burden of bailing out Greece on their own.

But private sector involvement must be voluntary to avoid triggering another downgrade of Greek debt to default status by ratings agencies, a development which could put the whole Greek banking sector at risk. (Additional writing by David Stamp; reporting by Angeliki Koutantou and James Mackenzie in Athens; Editing by Alison Williams)

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