European leaders agree to new Greek rescue plan

ROME — European leaders moved Friday to stanch the region’s lingering financial crisis, agreeing to $145 billion in new loans to Greece and measures to prop up weak banks and other national governments. A separate initiative allows private bondholders to help but raises the prospect that Greece will be considered in default on some of its debt.

The measures approved in Brussels mark a major financial consolidation of the 17 nations that use the euro — effectively pledging the creditworthiness of stronger countries such as Germany and France, and the resources of their taxpayers, to prop up failing banks or ailing governments throughout the euro zone.

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 Cutbacks demanded by international lenders have led to a public backlash, with tens of thousands of Greeks flooding into the main squares of cities across the country.

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German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed on a joint position to solve Greece's debt crisis ahead of today's leaders summit in Brussels to stamp out contagion in European bond markets. (July 21)

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After weeks in which financial markets began to threaten larger European economies such as Spain and Italy, officials said they were intent on erecting an effective “firewall” to protect their financial system — and the dec­ade-old euro currency.

“We could not allow a difficult situation to become a dangerous one. The threat had to be contained,” European Council President Herman Van Rompuy said at the end of a nine-hour negotiating session. “This is a strong package.”

Markets rallied as expectation of a deal mounted through the day, with bank stocks in Europe climbing dramatically and major indices in Europe and the United States posting strong gains.

The program for private bondholders, expected to be worth about $70 billion to Greece over the next three years, carries some uncertainty. Though offered voluntarily as a way to allow investors to swap existing bonds for longer-term notes, lessening Greece’s need for cash, it may prompt credit-rating agencies to declare the country in default.

The new program tries to work around that problem, and in particular to answer the threat that the European Central Bank would stop lending money to Greek banks if a default declaration were made. The program guarantees Greek banks access to cash and offers the ECB billions in guarantees and extra capital so that it will continue its lending.

ECB President Jean-Claude Trichet said he was satisfied with the outcome, although “we don’t know yet what the consequences will be” when rating agencies study the plan.

A U.S. official who spoke on the condition of anonymity said the program should prove a substantial step toward stabilizing Europe’s problems. President Obama has consulted with German Chancellor Angela Merkel, in particular, and encouraged aggressive steps.

The International Monetary Fund’s managing director, Christine Lagarde, the former French finance minister who helped craft last year’s unsuccessful response to the European crisis, called the new program “comprehensive and constructive.”

The centerpiece of the program is new loans to Greece, a country whose existing $160 billion rescue plan slipped off course with a deeper-than-expected recession and slower-than-expected economic reform. Buried under more than $400 billion in outstanding loans, the equivalent of 150 percent of the country’s annual economic output, Greece’s economy is still contracting
and unemployment has topped 16 percent.