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By Douglas Busvine
ST PETERSBURG, Russia (Reuters) - The International Monetary Fund hopes to reach a deal with Greece in July to extend fresh credit, after a time-out in talks for the government in Athens to review its economic strategy, First Deputy Managing Director David Lipton said.
"We've taken a pause because the government itself is having a discussion about its coalition and we've agreed to come back at the end of the month," Lipton told Reuters in an interview in St Petersburg, Russia, on Friday.
"As long as we can reach agreement by the end of July, funding is in place for the subsequent period and then we would be able to go forward."
Greece's performance on reforms required to unlock lending under a European Union-IMF bailout has slipped off track, with recent delays on privatization a concern.
But Athens is "dedicated to solving the problems that their country faces", Lipton told Reuters.
A row over the abrupt closure of Greece's state broadcaster led to the smallest party in the country's ruling coalition pulling out of the government on Friday, leaving Prime Minister Antonis Samaras with a tiny majority in parliament.
The move coincided with a new hitch in Greece's EU-IMF bailout with the discovery of a potential funding shortfall due to the reluctance of some euro zone central banks to roll over their holdings of Greek government bonds.
FED WITHDRAWAL POSITIVE
In other comments, Lipton said emerging economies should let their financial markets operate despite volatility triggered by the Federal Reserve's announcement of plans to wind down monetary stimulus aimed at driving a U.S. economic recovery.
"For most countries the best thing to do is to let the markets function. The markets can handle inflows and outflows within certain bounds," said Lipton.
If there are disorderly foreign exchange markets there may "in some cases and for some time period" be reason for the authorities to step in to maintain market order.
Liquidity may require monitoring on some emerging bond markets, but foreign exchange trading is not a concern, said Lipton.
The Fed's stimulus withdrawal would be a "net positive" that indicates the U.S. economy is strong enough to help the rest of the world.
"The Fed, when it exits, will exit because the recovery is strong enough to warrant exit," he said.
"A strong U.S. economy - even one that is appropriately restrained by a normalization of interest rates - is going to be an economy that is strong enough U.S. economy to help the rest of the world."
Funding strains have emerged in China's so-called 'shadow banking' system, and the IMF has advised Beijing to pay close attention to the rapid growth of credit that sustained high rates of growth through the global slump.
"We are concerned that supporting growth through a credit-fueled investment boom was a model that could be reaching its limits," Lipton said.
"I think it's perfectly understandable that the central bank would be trying to restrain credit growth."
(Additional reporting by Kiryl Sukhotski; Editing by Ron Askew)