The US has said that it will work closely with European partners to preserve market confidence after the Greek election.

US Treasury Under Secretary Lael Brainard said "Everyone is well prepared...in the wake of the elections on Greece.

European markets closed higher on Friday on the expectation that central banks would work together in the event of a Greek exit.

Greeks vote on June 17 as world economic powers gather in Los Cabos, Mexico for a meeting of the Group of 20.

The IMF warned Friday that Spain must implement comprehensive reforms to win back market confidence even after securing a huge rescue loan for its stricken banks.

In a hard-hitting report less than a week after the euro zone agreed on a banking rescue of up to 100 billion euros ($125 billion) for Spanish banks, the International Monetary Fund listed a string of needed reforms.

IMF prescribes Spanish medicine

The reforms include raising VAT, legislation on public wage cuts, separating "non-viable banks" from those that need no aid and those that are viable but need support.

The backdrop, it warned in an annual report on the Spanish economy, was grim.



"Market confidence remains weak and the outlook is very difficult," the Fund said.



Spain's risk premium, the extra interest rate investors demand for its 10-year bonds over their safer German equivalent, hit 5.54% on Friday, the highest since the 1999 birth of the euro zone.



The nation's 10-year bond yields spiralled to 6.967% earlier in the week, another euro-era record.



Recession was deepening, unemployment was at 24% and rising, and homes and businesses trying to shed debt would likely mean falling output this year and next, the IMF said.

World markets rally on Central Banks pledge



Stocks around the world rallied on Friday despite uncertainty over Greece as investors appeared to bet on fresh stimulus from the United States and Europe to boost growth and fight the euro zone crisis.



Asian markets started the rally, with European markets following and US stocks extending Thursday's gains in early trading.



Madrid gained 0.34% and Milan jumped 2.34% after the Italian government adopted growth measures and plans to sell off some state-held companies and property.



In foreign exchange deals, the euro drifted up to $1.2635 from $1.2630 late Thursday in New York. Sterling rose against the euro and dollar in afternoon trading after initially dropping following the stimulus news.



ECB chief Mario Draghi warns of "serious risks"



ECB chief Mario Draghi fuelled speculation of an imminent rate cut or other measures, warning Friday of "serious downside risks" to the euro area economy while inflation saying was no threat.



However, with Spain's borrowing costs pushing to record highs despite a €100 billion bank bailout, traders remain on edge.



The IMF said Friday that Spain will likely miss its budget-cutting deficit target for 2012 and it pushed Madrid to adopt broad reforms as it grabs a rescue line for stricken banks.



All eyes turn to Greece

In Europe, authorities also laid plans for tackling turmoil such as if Greeks emptied their bank accounts should the SYRIZA party, which has promised to tear up the country's bailout deal with the EU and the IMF, score a decisive victory on Sunday.

SYRIZA leader Alexis Tsipras said the memorandum deal with Greece's international lenders, which has helped to push the economy into a depression, would not last beyond the weekend.

However, French President Francois Hollande warned Greek voters about seeking what Tsipras has promised - a future in the euro while ditching the €130 billion bailout deal sealed earlier this year and its demands for punishing austerity policies.

Hollande said on Greek TV that he wanted the country to stay in the euro, rather than reviving its drachma currency. "But I have to warn them, because I am a friend of Greece, that if the impression is given that Greece wants to distance itself from its commitments and abandon all prospect of recovery, there will be countries in the euro zone which will prefer to finish with the presence of Greece in the euro zone," he added.

SYRIZA is running neck-and-neck with the mainstream conservatives for Sunday's parliamentary vote, a re-run of an election last month that produced a stalemate in which neither the pro- nor anti-bailout camps were able to form a coalition.

Greek banking stocks soared more than 20% yesterday amid market talk that secret opinion polls were showing that a government favorable to the international bailout agreement was likely to emerge after the June 17 election.

Focus moves to G20 summit on Monday

G20 officials said that central bankers are ready to ensure enough cash is flowing through the financial system if severe market strains emerge after the elections in Greece, which coincide with votes in Egypt and France.

"The central banks are preparing for coordinated action to provide liquidity," said a senior G20 aide familiar with discussions among international financial diplomats.

Depending on the depth of any turmoil, an emergency meeting of ministers from the Group of Seven developed nations could be held on Monday or Tuesday during the Mexican summit of leaders from the G20, which includes major emerging economies such as China.

Britain did not wait for the elections to announce action. Bank of England Governor Mervyn King said the country would launch a scheme to provide cheap long-term funding to banks to encourage them to lend to businesses and consumers.

The Bank of Japan also acknowledged the nervousness surrounding Europe's debt crisis. "The Bank of Japan will do its utmost to ensure the stability of Japan's financial system," it said in a statement after its policy meeting.

Faced with Greek defiance, officials said the euro zone would not tear up the main targets of the bailout no matter who wins the elections, but it might consider giving a new government in Athens some leeway on how it reaches them.

"The headline targets cannot be changed," one senior EU official told Reuters. "There could be some tweaks to the path to get there, but not the goals."

Euro-zone finance ministers are scheduled to hold a teleconference on Sunday evening to discuss the poll outcome. One euro-zone official said that the main concern, if SYRIZA overwhelmingly won the election, was the risk of large capital outflows from Greece if depositors worry their savings in euros could later be frozen or converted into new drachmas.

"It is not even about a bank run on Monday morning after the elections. People can now log on to Internet banking and make transfers on Sunday evening as well," an official said, explaining the rationale of the ministerial call.

Spain and Italy, under increasing fire in Europe's debt crisis, earlier promised new measures to repair their public finances as their soaring borrowing costs raised new alarm. But German Chancellor Angela Merkel rebuffed pressure from EU partners and the US for Europe's most powerful economy to underwrite debt or guarantee bank deposits in the single currency area.

Spain's 10-year bond yield hit a euro lifetime high around 7% yesterday - a danger level above which Greece, Ireland and Portugal were driven to seek international rescues - despite last weekend's euro zone agreement to lend Madrid up to €100 billion to recapitalise ailing banks.

"It is not a situation that can be maintained over time and I am convinced that we will continue to take more measures in the coming days and weeks to help bring it down," Spanish Economy Minister Luis de Guindos said.

Moody's Investor Service slashed Spain's sovereign credit rating by three notches to Baa3, just one level above junk on Wednesday night, citing the government's "very limited" access to international debt markets and the weakness