4 Min Read
* Lenders unlock 8.5 bln euros of loans for Greece
* Deal lets Athens avoid default on July bailout repayments
* May pave way for Greece to join ECB QE scheme
* 10-year yields down 20 bps at 5.64 pct
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)
By Dhara Ranasinghe
LONDON, June 16 (Reuters) - Greece's short-dated government bond yields fell to their lowest since 2014 on Friday after euro zone governments threw Athens a credit lifeline worth 8.5 billion euros ($9.5 billion) and sketched out new details on possible debt relief.
Most euro zone yields were a touch lower on the day after heavy selling on Thursday on the prospect of tighter monetary policy in the United States and Britain.
The spotlight was back on the bloc after a late deal on Thursday that allows indebted Greece to avoid a default on bailout repayments due next month.
Some analysts said the agreement could open the door for the European Central Bank to start buying Greek government bonds under its stimulus scheme in the coming weeks, and possibly pave the way for a return to markets.
The ECB needs more clarity on what kind of debt relief Greece will get from its international creditors if it is to buy Greek bonds as part of its stimulus programme, a source close to the matter said on Friday.
A French proposal to help bridge differences on debt relief is expected to underpin further euro zone discussions and the International Monetary Fund said it would join the existing bailout, offering Athens a standby arrangement of less than $2 billion.
"This is a major step forward, in our view, coming after many months of uncertainty," HSBC European economist Fabio Balboni said.
"The deal should pave the way for the ECB to include Greece in its QE (quantitative easing) programme, which in turn should unlock access to markets for Greece, putting the country on the right track towards exiting the bailout programme next year."
Greek 2-year bond yields fell 20 basis points to 4.76 percent, their lowest level since October 2014, while 10-year yields fell a similar amount to a low of 5.64 percent, the lowest since May 22.
In Athens, the benchmark stock index rose more than 1 percent to its highest level since June 2015 at one stage and was up 0.8 percent at the close.
Greek Prime Minister Alexis Tsipras said on Friday the deal strengthened confidence in markets, while a German government spokesman said it would help restore Greek competitiveness.
Greece will return to markets once its borrowing costs drop below 5 percent, sources told Reuters this month. That could happen if the ECB includes Greek bonds in the 2.3 trillion stimulus scheme.
Still, some analysts were sceptical about Greece's inclusion in the programme.
"If the ECB started buying GGBs (Greek government bonds), this would fuel another tightening leg in the bond market," Commerzbank rates strategist Christoph Rieger said.
"But as this process will likely drag into the ECB's tapering phase, I'm sceptical whether they will be buying GGBs at all while QE is still on."
Outside Greece, bond yields were slightly lower towards the end of the day, with German 10-year government bond yields down a basis point at 0.28 percent.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Editing by Keith Weir and Andrew Roche