Eurozone Agrees on Bailout Plan for Greece

Greek Prime Minister George Papandreou and German Chancellor Angela Merkel at a press conference in Berlin

John Macdougall / AFP / Getty Images

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(BRUSSELS) — German Chancellor Angela Merkel praised a hard-won deal to rescue heavily indebted Greece from its financial woes, insisting Friday that it will steady the wobbly euro and showed that Europe could cope with the crisis despite having asked the International Monetary Fund to join in on a bailout package.

"I am very satisfied with yesterday's summit because I think that it demonstrated Europe's capability to handle things and at the same time did something for the stability of the euro and for solidarity with a country that is in difficulty," Merkel said while entering the second day of an E.U. Council of Ministers summit. (See 25 people to blame for the financial crisis.)

"For us, it is also important in the long term that the euro, which is such a success for peace and unity, remains stable. Yesterday was an important day for the euro," she said.

The deal, reached late Thursday night at a meeting of European leaders, aims to halt the government debt crisis undermining Europe's currency union. (Read: "Bailout Showdown: Greece and Germany Raise the Stakes.")

The joint eurozone and IMF bailout program comes with strict conditions, making no money available to Greece right now. It could be tapped only if Greece — or other financially troubled eurozone members — cannot raise funds from financial markets and would require the unanimous agreement of the 16 eurozone countries to release the loan funds.

The agreement was a clear victory for Merkel, who demanded that a rescue for Greece only come when the country runs out of other options. She also insisted that any backstop must include the IMF.

It was also a comedown for the French and the European Central Bank, which had opposed turning to the IMF out of fear it would damage the euro's prestige and show that Europe was unable to solve its own financial woes. The eurozone has never turned to the IMF.

ECB President Jean-Claude Trichet said he had wanted a program that emphasized governments' "maximum responsibility" to limit debt, praising the program as a "workable solution" that would "normally not need to be activated."

He said Greece should now "progressively regain the confidence of the market" and be able to borrow at lower interest rates. Trichet said that he assumes markets will end recent volatility. "That's my working assumption," he said.

The spread between Greek 10-year bonds and equivalent German issues — a key indicator of market trust — narrowed to 305 basis points Friday, down from about 330 on Thursday morning. But the level is still high, and translates to a cost of borrowing for Greece that is about double that of Germany's.

The euro, meanwhile, rose to $1.3377 in early trading from the 10-month lows of $1.3291 it fell to Thursday.

Greece's debt crisis has showed up the eurozone's inability to keep member economies' debt and deficits within strict limits — and the lack of a safety net for eurozone countries that risk being unable to pay their debts.

The new plan sets up a possible rescue program for the first time. All eurozone nations are pledging to help — although any contribution would be voluntary.

"We hope that it will not have to be activated," said the European Union's president, Herman Van Rompuy. "This would be triggered as a last resort. Luxembourg's prime minister Jean-Claude Juncker, who heads the group of eurozone finance ministers, said "speculators will be discouraged because they know from now on we have this instrument."

Greek government officials say they believe the existence of a eurozone safety net will help them borrow at lower costs. They expect the spreads to fall significantly in coming weeks.

"We hope and believe that we won't ever use it," a Greek official said under condition of anonymity.

French President Nicolas Sarkozy said eurozone nations would offer loans totaling some two-thirds of the package with the IMF offering the last third.

Juncker said they did not agree an amount of a possible bailout for Greece. Two diplomats earlier said the total loans would be some euro22 billion.

Eurozone nations also want to take steps to prevent debt and deficits getting out of control again, calling for tougher rules and sanctions. Van Rompuy has been tasked with drawing up possible options to toughen E.U. oversight of member's budgets and economic performance.

The bailout program could also be used to help other vulnerable eurozone nations such as Portugal and Spain who have seen debt soar after the global economic turmoil of the past several years saw their economies sink into recession.

Greece needs to borrow some €54 billion this year and must refinance some €20 billion in April and May. It has been able to sell bonds but says it cannot keep paying the high interest rates investors have been demanding to counter the risk they see that Greece could default.

Associated Press writers Raf Casert, Elena Becatoros, Deborah Seward, Gretchen Mahan and Robert Wielaard in Brussels, Kirsten Grieshaber in Berlin and Carlo Piovano in London contributed to this story.

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