* Greece averts immediate default, intends to use CACs * Relief limited as poor economic outlook takes centre stage * Spain to underperform further on growth, budget worries * Portugal widely seen as next in line to restructure By Marius Zaharia LONDON, March 9 (Reuters) - Greece's successful debt restructuring brought some relief to Italian and Spanish bonds on Friday, but poor euro zone growth prospects and fears Portugal may also impose losses on creditors were likely to limit the fall in yields. Greece averted the risk of an immediate uncontrolled default, which some said could cause damage of more than a trillion euros throughout the euro zone, after nearly all its creditors agreed to take heavy losses on their debt holdings. But the market's focus immediately shifted to data showing an increased chance of recession across the bloc and the risk of further debt restructurings in Greece and elsewhere. Even after its bond swap, Greece carries massive debts with no sign of growth to ease the burden. The new Greek bonds for which investors are to swap their current holdings were quoted in the grey, pre-issue market, with yields above 15 percent, reflecting a high risk of default. The levels are higher than those of Portugal, whose 2023 bonds trade at 14.18 percent while its 2037 bonds trade at 11.11 percent. "Greece is the test bag," said Peter Allwright, head of absolute rates and currency at RWC Partners, which manages assets worth $4 billion. "The big risk is that Greece leaves the euro and it works. Then you've got huge incentives for countries like Portugal and Spain to follow suit." Allwright had no exposure on Spain and was looking to go short in Italian bonds when 10-year yields, which fell 8 basis points to 4.74 percent on Friday, dropped to 4.5-4.75 percent. He still favoured core euro zone debt, especially German five-year bonds. Concern that Greece would not win sufficient support for its debt swap pegged German yields near record lows, but the debt deal saw them edge higher on Friday. Ten-year Bund yields could go as high as 1.85 percent if key U.S. jobs data later in the day comes out better than expected, RIA Capital Market's bond strategist Nick Stamenkovic said. If the U.S. non-farm payroll figure is worse than expected, DZ Bank rate strategist Michael Leister said last week's lows of around 1.78 percent may be the lower target for Bunds. The U.S. economy is expected to have created 210,000 jobs last month, according to a Reuters survey, following January's tally of 243,000. The unemployment rate is expected to have held at a three-year low of 8.3 percent. Bund futures were last up 3 ticks at 138.36, while 10-year yields were a touch higher at 1.805 percent. The cost to insure euro zone debt against default via credit default swaps was steady. IN THE FIRING LINE Greece's economic prospects remained the worse in the euro zone. Under International Monetary Fund assumptions, which many view as optimistic, the swap will only reduce Greece's debt to 120.5 percent of its economic output by 2020. Moreover, the country has a track record of failing to meet its budget goals, and political risk is high before elections in April or early May. All this is likely to keep prices on the new Greek bonds very low. "Our expectation was that the new bonds would trade somewhere between the old Greece and Portugal. Our anecdotal feedback from the client side shows there is not much (buying) interest out there," DZ Bank's Leister said. Portugal's yields were slightly lower across the curve in thin trade, but its debt is expected to remain under selling pressure as the country is seen as the euro zone's next weakest link. ING rate strategist Alessandro Giansanti said a restructuring probability of more than 30 percent was already priced in. "Portugal clearly will be the first country in the firing line," said Sanjay Joshi, who manages $1 billion as head of fixed income at London and Capital. "Spain would be the second one. What you need for us to re-enter Spain is (that) the European Commision is slightly more realistic in what they expect from Spain. You cannot have further austerity with (such high) unemployment staring you in the face." Spanish bonds have underperformed Italian debt in recent weeks after data showed it missed its 2011 budget goal and that it was likely to suffer a more pronounced economic contraction. ING's Giansanti saw the spread between Spanish and Italian 10-year yields widening to 50-60 bps from 20 bps currently. Outright Spanish benchmark yields were down 11 basis points on the day at 4.97 percent.

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