After more than 12 hours of talks, the countries that use the euro reached an agreement early today to hand Greece 130 billion euro ($170 billion) in extra bailout loans to save it from a potentially disastrous default next month, a European Union diplomat said.
The euro surged as the news broke, climbing 0.7% to $1.328 within minutes. While much depended on the details of the deal, a final agreement on the bailout for Greece will take some pressure off the 17-country currency union, which has been battling a serious debt crisis for two years.
The deal -- details of which were still being worked out by European finance ministers in an all-night session in Brussels -- was expected to bring Greece's debt down to 120.5% of gross domestic product by 2020, according to the official. That's around the maximum that the International Monetary Fund and the eurozone considered sustainable.
The diplomat spoke to the Associated Press on condition of anonymity because a formal announcement was pending.
The country needs the 130 billion euro bailout so it can move ahead with a related 100 billion euro ($130 billion) debt relief deal with private investors. That deal needs to be in place quickly if Athens is to avoid a disorderly default on a bond repayment on March 20.
An uncontrolled bankruptcy would likely force Greece to leave the 17-country currency union and return to its old currency, the drachma, further shaking its already beaten economy and creating uncertainty across Europe.
Last week, a new report from Greece's debt inspectors indicated that the country's debt would still be close to 129% of GDP by the end of the decade, despite massive new spending cuts planned by Athens and a tentative 100 billion euro debt relief deal with private investors.
That level would have prevented the IMF and some euro countries from putting up more rescue money -- on top of a 110 billion euro bailout Greece received in 2010.
Moving in and out of talks with bondholder representatives and consultations with the IMF and the European Central Bank, the ministers pushed private investors to accept steeper losses.
A senior eurozone official said private holders of Greece's debts have agreed to a face value loss of 53.5% on their bonds.
The investors -- mostly banks and investment funds -- have agreed to swap their bonds for ones with longer maturities and lower interest rates. Jean-Claude Juncker, the prime minister of Luxembourg who also chairs the meetings of eurozone finance ministers, said the interest rates would start at 2% and eventually rise to 4.3%.
The big question will now be how many banks and other investment funds will actually agree to participate voluntarily and whether Greece will have to force some holdouts to sign up to make the deal effective.
The lower debt level also suggested that the ECB agreed to forego some profits on its Greek bondholdings to help close the funding gap in the new bailout package. Analysts estimate that the central bank owns between 50 billion euro and 55 billion euro in Greek bonds, which it bought at a discount.
Despite the deal, Asian markets fell today. Japan's Nikkei 225 index was down 0.2% at 9,464.19. Hong Kong's Hang Seng fell 0.5% to 21,323.99 and South Korea's Kospi lost 0.8% to 2,009.79. Benchmarks in Taiwan, Singapore, mainland China and the Philippines also fell.
Many observers felt the agreement fell far short of what Greece needs to prevent financial collapse. "Greece is a hopeless case," said Francis Lun, managing director of Lyncean Holdings in Hong Kong.
