Eurozone leaders finally capitulated to the inevitable last night and agreed to restructure Greece's unsustainable €350bn (£310bn) national debt in return for a second bailout package for the country.
There will be some €109bn from European governments, plus about €50bn from the banks over the next five years, with further contributions from them to follow.
The private sector's contribution will build to €106bn by 2020, the EU predicts. Greece, Ireland and Portugal will benefit from a longer time to pay their existing rescue packages plus a lower interest rate – a particularly welcome result for Dublin. President Nicolas Sarkozy of France heralded new powers for the existing bailout fund with the prediction that it would become a "European IMF" – a substantial quickening in the pace of what Mr Sarkozy called "European economic governance".
Some EU insiders are calling it a "quantum leap", though it has, as yet, had no extra funds devoted to it. It follows comments in London by the Chancellor, George Osborne, that he supported the eurozone as a whole issuing bonds, so called "eurobonds" – a move that would further isolate the UK from European decision-making.
Meeting under enormous pressure to get a grip on the crisis, the 17 heads of government signed off a new lifeline, with private investors for the first time shouldering a large share of the burden, though on a voluntary basis.
The deal goes a long way towards meeting demands by the German Chancellor, Angela Merkel, that banks be made to "share the pain" of bailouts. Senior officials from leading European banks, who also met at the summit venue, agreed to provide about 20 per cent of the funding by 2014. Ms Merkel said: "We met here under very difficult circumstances and as eurozone countries we've shown that we're now up to dealing with this crisis and we're taking responsibility for Europe and for our single currency. What we [as Germans] are now doing for the euro, we are getting back many times over in terms of benefits for our country."
Markets responded favourably to the deal. Bank shares and the euro, which had seen some volatile trading, stabilised as details of a draft agreement emerged.
The banks that do decide to accept a discount on their bond holdings will lose about 21 per cent of their face value. Much, however, still depends on what market analysts make of the detail of the deal, and whether the credit ratings agencies will declare it a "credit event". If they do, and choose to view it as a "selective" default, it could still trigger a panic.
The danger is that investors may conclude that the discounts now being applied, albeit voluntarily, to the holders of Greek government debt could be applied equally to Portuguese, Irish and – most dangerously – Spanish and Italian government bonds.
Should the interest rates demanded by investors to hold Spanish and Italian government bonds rise much more they would threaten a much larger default and sovereign debt crisis for the eurozone, and call into question the euro itself.
The leaders also agreed to:
* review Ireland's ultra-low rate of corporation tax;
* allow the European Financial Stabilisation Fund to bail out banks and take pre-emptive action to rescue countries in trouble; and
* reject a French plan to raise €50bn for the bailout through a tax on banks.
The centrepiece of the new bailout will be an offer to existing holders of Greek government debt to swap bonds they hold now that are coming due for repayment over the next eight years, for new 30-year bonds guaranteed by the eurozone as a whole. Though investors would be required to accept some losses, they would receive a more secure asset in return, and only on a voluntary basis.
As European leaders were in discussions over a deal on Greek debt, taxi drivers blocked the country's streets and airports for a fourth day over government plans to deregulate their profession. Alexis, an engineer who protested government cuts, said: "All we need to do is just focus on ways to keep our jobs and restore growth."
Spain paid a record-high rate to sell two long-dated bonds ahead of the Brussels meeting yesterday, despite the summit calming markets. Despite the extra incentives needed to encourage debt buyers, the stock market climbed 2.9 per cent after falls for two weeks.
The reaction in Dublin is likely to be favourable if the deal emerging in Brussels is in line with early reports. The parties of the ruling coalition had pledged, before and after the general election this year, to push for a reduction in the interest rates imposed by the IMF and EU for last year's bail-out package.
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