Late-night bailout heralds a new dawn for the eurozone

Shares rally and single currency rises after 'European IMF' is established in rescue package to halt Greek debt crisis

European leaders and financial markets yesterday welcomed the long-awaited Greek bailout as commentators hailed the package as a step marking the beginnings of an EU version of the International Monetary Fund.

The €109bn rescue deal hammered out at Thursday's emergency summit of eurozone leaders caused shares to rally across Europe and helped the euro to rise against the dollar. British and French markets gained more than one per cent in trading yesterday while the Nikkei closed up 1.2 per cent.

Banking stocks rose sharply on the news that the package contained no special private bank tax for the time being. "We have sent a clear signal to the markets by showing our determination to stem the crisis and turn the tide in Greece," said the Dutch Prime Minister, Mark Rutte.

The key element in the eurozone package involving a substantial voluntary contribution from private lenders was praised by Germany's Chancellor Angela Merkel. "I strongly welcome the voluntary contribution from the banks," she said in Berlin. "I believe that this is the right signal coming at a difficult time," she added.

Ms Merkel had insisted that private bank contributions should be a pre-condition for German agreement on a new package because of voters' concerns about cost of bailouts for the taxpayer. Yesterday Ms Merkel went out of her way to stress that the amounts would be kept as "low as possible."

The European Central Bank had been strongly opposed to a restructuring involving the private sector. However the ECB President, Jean-Claude Trichet, was forced to drop his objections to the idea after being summoned to appear at a late-night, pre-summit meeting between Ms Merkel and President Nikolas Sarkozy in Berlin on Wednesday.

Yesterday the markets failed to take much notice of announcement by the ratings agency Fitch which declared that under its criteria the terms of the package constituted a "default".

President Sarkozy meanwhile played down the significance of the bank's participation in the rescue package. "If the ratings are using that word (default), it is not part of my vocabulary. Greece will pay its debt," he said.

Under the deal the remit of the eurozone's European Financial Stability Facility (EFSF) – a €440bn aid fund set up last year – will be extended.

The fund, which has already been used to rescue Portugal and Ireland, will be given broader powers to combat the growing problem of contagion resulting in the debt crisis spreading to weak eurozone member such as Italy and Spain.

German commentators were yesterday describing the move as the beginnings of a European monetary fund. Some, while recognising that the project was still in its infancy, hailed it as the most significant development since the single currency's introduction.

The new EFSF blueprint will empower the fund to recapitalise banks, increase credits and provide financial aid to EU member states before they reach bailout point. The idea was initially proposed by Wolfgang Schäuble, Germany's veteran pro-Europe Finance Minister last year. However it was flatly rejected by Ms Merkel who insisted that the IMF be involved in eurozone rescue deals.

Her acceptance of a fledgling EMF appears to have been the price Ms Merkel paid for pushing through her demand that private banks share the burden of eurozone bailouts.

The Deal In Numbers

Some of the EU's figures are confusing even the experts. Here, we try to read between the lines...

€109bn

This is the figure quoted for the "official" side of the second Greek bailout – that is the cost to the eurozone and the IMF rather than whatever sum the banks might be expected to surrender. It is on top of the first €110bn bailout agreed in 2010. Some €65bn of that has been lent to Greece. In all the eurozone/IMF bailouts amount to €219bn, almost as large as Greece's annual output of €230bn.

€37bn

According to the summit communiqué this is the "net contribution of the private sector" from now until 2014. There's another €12.6bn to be attributed to a "debt buy-back programme" – a trade-in scheme for old Greek bonds in return for European ones. This rises to €106bn by 2019. However that is far too large a figure to be plausible – it might even exceed the value of the banks' holdings of Greek debt. It seems, from data published by the Institute of International Finance that this is merely the nominal value of the bonds the banks are planning to trade in for new bonds guaranteed by the eurozone.

€26bn

The actual amount the banks may sacrifice to get the deal going: nothing like as generous as the numbers bandied around by the EU, representing just a fifth of the total. Politically it was important for negotiators to show they got something back for taxpayers.

£1.6bn

What the UK will pay towards the second Greek rescue. It is because Britain is liable for 4.85 per cent of all IMF lending, which in this case comes to €36bn. Not a figure to mention to eurosceptic Tories.

21%

A loss of around one-fifth is what the banks say they will be left with in return for agreeing to help out on this deal – but that too is only correct if you assume they would have seen all their money back from their investments in Greek government bonds. That might not have happened if Greece had been allowed to undergo a chaotic default, in which case their holdings might have been wiped out. Then again the banks know that they would be far more damaged if they allowed this crisis to continue and to trigger a second credit crunch – that could easily destroy entire banks.