BRUSSELS -- The leaders of the 17 eurozone countries today agreed on a second bail-out package for Greece together with the International Monetary Fund (IMF) worth a total of 109 billion euro ($157 billion).
They also took what's being seen as a radical decision to vastly increase the power of the euro rescue fund so that it can bolster weak economies and stave off future financial instability in the region
The move to calm markets and safeguard the currency union seems to have succeeded: as news of a deal emerged, the euro and European stocks rallied sharply.
Dutch Prime Minister Mark Rutte said the leaders had "sent a clear signal to the markets by showing our determination to stem the crisis and turn the tide in Greece, thereby securing the future of the savings, pensions and jobs of our citizens all over Europe."
The president of the European Council, Herman Van Rompuy, stressed that the measures would be sufficient to stop the debt crisis spreading to other countries in the eurozone. "We have shown that we will not waiver in the defense of our monetary union and our common currency," he said, adding, "When European leaders say that we will do everything what is required to save the eurozone, it is very simple: We mean it."
Second Time Around
The European Union and the IMF offered Greece a three-year,110-billion-euro rescue package in May 2010 but that has proved insufficient, forcing eurozone leaders to negotiate a second emergency plan for Athens.
This time around, EU leaders secured the involvement of private bondholders such as banks, insurers, and investment funds, which will contribute 37 billion of the package, meeting a central demand by Germany and other northern eurozone members who have been insisting that not only taxpayers should bear the costs.
Banks will be allowed to support Greece through a menu of options such as bond exchange and buybacks. Both the French bank BNP Paribas and the German Deutsche Bank had representatives attending today's emergency summit in Brussels and are expected to participate.
The leaders also made detailed provisions for limiting the damage if, as seems likely, credit rating agencies declare Greece to be in temporary default -- the first such event in the 12-year history of the euro.
'A European Package'
In acknowledging that the swap scheme may lead to Greece being declared in selective default, French President Nikolas Sarkozy said euro zone nations stood ready to protect Greek banks from the fallout, by providing credit guarantees if needed to ensure they can still obtain liquidity from the European Central Bank.
EU Commission President Jose Manuel Barroso said the involvement of the private sector signified a new phase in the crisis response. "I think it is, for the first time since the beginning of this crisis, that we can say that politics and the markets are coming together."
Greek Prime Minister George Papandreou said that the plan could put his country on its feet again but insisted the measures were necessary for Europe as a whole.
"This is a European success, a European package. It's not only a Greek response. It is not only a response from Greece or for Greece but it is a European response for Europe so that we realize - each of our peoples - realize the potential we have. That is what we want to do in Greece but also we realize the potential as Europeans," he said.
The involvement of the private sector will only be applicable for Greece and not Ireland and Portugal, which have also received bail outs.
But all three countries will benefit from a decision to lower the interest rates of their loans, from 4.5 percent to 3.5 percent, and an extension of debt maturities from seven-and-half years to a maximum of 30 years.
Future Planning
The other major decision made at the summit was to vastly expand the 440 million euro rescue fund established in May of last year -- the European Financial Stability Facility (EFSF).
The EFSF will now be allowed to intervene preemptively, before a country is in full-blown crisis mode. Money from the fund could also be used as "precautionary credit lines" in certain situations to recapitalize banks in countries that have not yet been bailed out, to avoid a situation where they are shut out of credit markets.
It will also be able to buy up back bonds of struggling eurozone governments on the open markets.
The expanded role of the EFSF is designed to prevent bigger euro zone states such as Spain and Italy from being shut out of the markets in the event of a Greek default.
The transformation of the EFSF has been dramatic considering that the fund was set up in a hurry in the wake of the debt crisis to provide emergency funds for economically troubled countries in the monetary union.
With the new powers the fund has developed into a European version, albeit smaller, of the IMF.