European leaders struck a deal to provide financial
aid to
Greece
on Thursday, in an unprecedented move to stave off a broader crisis in
the 16-nation bloc that shares the euro single currency.
The details of the package were not expected to be
finalized until early next week, when EU finance ministers meet, but the bloc's
leaders suggested it could include some form of loans to
Greece
to help it service its debt and avoid a damaging default.
As they announced the
deal, EU leaders also urged
Athens
to make deep cuts to its budget deficit to restore confidence in its
economy, and the broader euro zone, and prevent its fiscal crisis from spilling
over to other high-debt states like
Portugal
and
Spain
.
"There is an
agreement on the Greek situation," EU President Herman Van Rompuy told
reporters gathered at a summit of leaders from the 27-nation EU in
Brussels
.
"Euro area member
states will take determined and coordinated action if needed to safeguard
stability in the euro area as a whole," he said.
The agreement was
forged in talks between Van Rompuy, European Commission President Jose Manuel
Barroso, French President Nicolas Sarkozy, German Chancellor Angela Merkel,
European Central Bank President Jean-Claude Trichet and Greek Prime Minister
George Papandreou.
Germany
and
France
are expected to take the lead in providing support, in part because
other big euro zone economies like
Italy
and
Spain
are themselves under financial pressure.
Economists said the
plan, while short on details, was likely to enhance market confidence in
Greece
,
which has seen its debt and equity markets hammered over the past month.
But it is also a clear
sign that the bloc's fiscal rules have failed and raises "moral
hazard" questions because
Greece
has a history of manipulating deficit figures to meet EU rules.
Until this week, EU
leaders had avoided speaking openly about a bailout, fearful it might ease
pressure on the government in
Athens
to enact tough austerity measures needed to bring down a deficit that
hit 12.7 percent of gross domestic product (GDP) last year -- more than four
times EU limits.
MARKETS WANT DETAILS
The euro spiked higher
against the dollar after the deal was announced, before slipping back on the
lack of detail. The yield spread between Greek bonds and benchmark German
issues narrowed but then widened again.
"It takes away
the one-way bet on Greek debt by creating the possibility of an announcement of
a detailed plan at any time in the future," Luigi Speranza, an economist
at BNP Paribas, said.
"If this is
successful in enhancing market confidence, ultimately the bailout could not
even be needed."
Polish Prime Minister
Donald Tusk told reporters in
Brussels
that the support, which would be the first bailout of a euro zone
member since the currency zone was created 11 years ago, was likely to come in
the form of loans.
"It could be
voluntary loans from member states. That seems to be the best option,"
Tusk said.
Another possibility
sources raised would be for
Germany
's
state-owed KfW bank to issue bonds and use the proceeds to buy Greek debt,
thereby ensuring that a sizeable portion of
Greece
's
financing requirement is underwritten.
It was unclear whether
any aid would be made available to other euro zone countries.
European leaders are
keen to prevent
Greece
's woes from spreading to other members and plunging the currency area
into a bigger crisis that could reverberate around the globe.
"
Greece
is a part of the European Union and won't be left on its own, but there are
rules and these rules need to be adhered to," Chancellor Merkel said.
White House economic
adviser Christina Romer said the Obama administration was watching the Greek
developments closely and believed there had been "good progress."
SOCIAL UNREST RISK
Athens
needs to borrow 53 billion euros ($75 billion) this year to cover its
deficit and refinance debts that are expected to climb to 290 billion euros --
nearly 120 percent of GDP.
Van Rompuy called on
the Greek government to implement steps to consolidate its budget in a
"rigorous and determined" manner and said the European Commission
would closely monitor progress in consultation with the European Central Bank.
He said the EU could
ask Greek to take additional measures and would draw on the expertise of the
International Monetary Fund.
Athens
has already pledged to cut its deficit by four percentage points this
year.
Even with EU support,
the Greek government faces a daunting challenge to consolidate its budget and
restore confidence in an economy whose imbalances were exacerbated by the
economic and financial crisis and where social unrest remains a threat.
Greek unemployment hit
its highest level in nearly five years, data showed on Thursday, and civil
servants said they would step up strike action to protest austerity measures
that include freezes on public sector wages and an overhaul of the tax system.