In Brussels, the governments insisted that Greece was 'a uniquely grave situation in the Euro area' Photo: AP
By Louise Armitstead, and Bruno Waterfield
11:30PM BST 21 Jul 2011
• Private lenders to contribute €37bn to
second Greek bail-out
• Paves way for European monetary Fund,
economic integration
• Debt interest rates cut for Greece, Ireland and Portugal
• Equity and debt markets rise on back of
historic deal
Greece is set to lead the eurozone's first-ever default as European
leaders agreed that the private holders of Greek debt will take a hit
of €50bn over three years.
Breaking weeks of deadlock, the heads of the 17 eurozone governments conceded that a "controlled" failure was the only way to prevent the collapse of the single currency and a global financial rout.
As part of the deal Greece will also receive another bailout package - from Europe, the International Monetary Fund and the private sector - worth €159bn.
The second bail-out, which follows the €110bn rescue funds agreed last May, will cut Greece’s debt by a quarter.
The private sector will provide €49.6bn via a variety of measures in the next three years including a €12.6bn debt buy-back programme. The fresh rescue attempt has been agreed to “decisively improve the debt sustainability and refinancing profile of Greece”.
In a bid to prevent the contagion seeping out across Europe, Brussels was granted radical new economic powers that pave the way for far greater economic union between members.
The eurozone's bailout fund, the European Financial Stability Facility (EFSF), was boosted with unprecendented powers of intervention and fundraising. The leaders also agreed to new governance commitments which Nicolas Sarkozy said would lead to greater economic integration.
Experts described the deal as a "significant step towards financial integration in Europe".
Releasing the agreement on Thursday night, Herman Van Rompuy, president of the European Council, said: "I am glad to announce that we found a common response to the crisis situation. We improved Greek debt sustainability, we took measures to stop the risk of contagion and finally we committed to improve the eurozone's crisis management."
In Brussels, the governments insisted that Greece was "a uniquely grave situation in the Euro area". In the draft agreement, the 17 leaders agreed that "all other euro countries solemnly reaffirm their inflexible determination" not to default.
However, the leaders moved to stand behind other indebted countries, too. The interest rates charged by the EFSF to the bailed-out countries – Greece, Ireland and Portugal – is set to be lowered to around 3.5pc. The draft document also repeated the commitment of Italy and Spain to lower their deficits while pledging that "Member States will provide backstops to banks as appropriate".
The markets reacted with relief that the deadlock that has paralysed the crisis talks looked set to be broken. Stock markets across Europe rose - some to their highest level for two weeks. In the UK, the FTSE100 rose 0.8pc and the FTSE Eurofirst 300 index was up 1.3pc. The euro was up more than 1pc and rose as high as $1.4401 as traders said that the agreement "took the heat off the ECB for the moment". In the credit markets, the yields on Italian, Spanish and Greek bonds declined sharply.
In Brussels, officials insisted that "all sides" in the crisis talks in Brussels had to concede ground.
The draft document also included agreements to:
• Boost economic growth in Greece, with the deployment of "structural funds" under a European "Marshall Plan". The members said they would "mobilize all resources necessary in order to provide exceptional technical assistance to help Greece implement its reforms".
• To stem the contagion the leaders agreed to lower the interest rates of the loans to the other bailed-out countries of Portugal and Ireland, too.
• For the future, the leaders said they would "commit to introduce legally binding national fiscal frameworks as foreseen in the fiscal frameworks directive by the end of 2012". They will also press ahead with a single European credit rating agency.
In the City there were fears that Britain could suffer from being excluded from tighter union in Europe. But Chancellor George Osborne said: "I think we have to accept that greater eurozone integration is necessary to make the single currency work and that is very much in our national interest…We should be prepared to let that happen."
Last night, while traders waded through the document, experts warned that the agreement would only provide temporary relief. Raoul Ruparel of Open Europe said: "Eurozone leaders have still failed to address the underlying problem of Greek solvency."