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Just in case

March 26, 2010

The 16 countries of the euro zone have reached a deal on a backup plan to aid Greece if it's unable to raise money to pay its debts through the international markets. The agreement gained praise across Europe.

A life preserver marked with EU stars floats atop a background of the Greek flag
Greece's prime minister called the new plan 'a step forward'Image: DW-Montage/bilderbox.de

Euro-zone countries have worked out an unprecedented deal to create an emergency financial aid package for debt-burdened Greece.

Speaking on the second day of a European Union summit in Brussels on Friday, German Chancellor Angela Merkel said she was "very satisfied" with the outcome and called the summit "an important day for the euro."

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

Greek Prime Minister George Papandreou was also full of praise for the decision, saying "Europe has taken a step forward."

"Europe and Greece will emerge stronger from this crisis," Papandreou told the Greek Net television channel. "It's a very satisfactory decision which will put in place a European mechanism with the involvement of the International Monetary Fund to guarantee the financial stability of the euro zone."

The deal agreed upon at Thursday's meeting would only be activated if Greece became unable to borrow money on the international market. The European Commission and the European Central Bank would both have to agree that a bailout was necessary, and the deal could be vetoed by any member of the euro zone. Greece would be required to pay interest rates above the average for the euro zone.

It would be the first time that the IMF loaned money to any of the nations using the euro currency, although it has been involved in lending to Hungary, Romania, and Latvia.

United front

French President Nicolas Sarkozy pats German Chancellor Angela Merkel on the shoulder
France and Greece reached a compromise on Greek aid during pre-summit talksImage: AP

Unnamed diplomats quoted by the German news ageny dpa said the loan would be around 20 billion to 23 billion euros ($27 billion to $30 billion), with two-thirds being paid by euro-zone states and one-third coming from the IMF. Each state's contribution would be determined by the proportion it contributes to the European Central Bank's total capital. That means Germany, which contributes 27 percent, would pay the highest proportion.

European Union President Herman Van Rompuy, speaking to journalists after the close of the summit's first day, said that all of the 16 euro-zone countries are ready to lend if necessary.

"All the members of the euro zone said that they would be willing to participate in the mechanism. This is very important," Van Rompuy said.

The deal marked the end of an impasse that had threatened to derail EU assistance completely and destabilize the euro zone. Earlier on Thursday, German Chancellor Angela Merkel and French President Nicholas Sarkozy said they had developed a compromise to help Greece in face to face talks preceding the summit.

Germany and France had different views on how to deal with Greece, whose growing debts raise concerns for the wider euro zone. Merkel has pushed for IMF aid, while Sarkozy wants to see the EU support Greece.

Bond markets react

Market reactions to the aid deal were mixed, with interest yields on Greek bonds falling but yields on French and German bonds rising.

Greek 10-year bonds fell Friday to 6.189 percent from 6.352 percent on Wednesday, before the German-French compromise was announced. The German 10-year bond, used as a benchmark in the euro zone, rose Friday to 3.154 percent from 3.133 percent Thursday evening.

Analysts at BNP Paribas bank stated that while the plan appeared to lower the risk on Greek bonds, other euro-zone states have put themselves at more risk.

"The agreement involving the IMF may be good news for Greece in the near term but bad news for EMU (economic and monetary union) in the medium term," BNP Paribas said.

Editor: Nancy Isenson