The European Financial Stability Facility (EFSF) would be used to provide cheaper loans to Greece, Portugal and Ireland, the eurozone leaders have agreed according to a draft document circulating in Brussels. The maturity periods of the loans would also be extended.

In addition, the EFSF could be used to intervene in secondary bond markets with advice from the European Central Bank. This means Germany has relented and Angela Merkel would have a tough domestic political fight ahead.

According to the draft document, EFSF would be allowed to "intervene on the basis of a precautionary programme, with adequate conditionality;- finance recapitalisation of financial institutions through loans to governments including in non programme countries;- intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional circumstances and a unanimous decision of the EFSF Member States."

In its introduction, the document claims the "recovery in the euro area is well on track and the euro is based on sound economic fundamentals", but acknowledges that "far reaching measures" have to be applied to tackle the debt crisis.

"We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole. We also reaffirm our determination to reinforce convergence, competitiveness and governance of the Euro area."

Eurozone leaders have not yet agreed on the figures for the second Greek bailout, an EU diplomat said. EFSF flexibility, including possible new powers to bail out banks in any euro-country, and the Finnish condition that Greek assets be put up as collateral are still to be discussed.

The European Central Bank is prepared to let Greece slide into temporary default, Reuters reports, citing EU sources. Earlier Dutch finance minister Jager told Dutch MPs that measures to resolve Greece’s debt crisis will include private sector involvement and a “selective default.”

 Second Greek debt deal announced 
Eurozone leaders holding an emergency meeting in Brussels have announced the details of a second bailout for the debt-ridden Greek economy.

The plan will include financing from both The European Union (EU) and The International Monetary Fund (IMF), as well as the private sector.

The Greek economy will get an injection of 109bn euros (£96.1bn) with more coming from the private sector in the coming decades.

This is the first time that private lenders have been involved in the bailout of a eurozone economy.

European Council President Herman Van Rompuy outlined what the eurozone’s 17 member nations had agreed.

"Today we reached three important decisions fully supported by all of us,” he said.

"We improved Greek debt sustainability, we took measures to stop the risk of contagion and finally we committed to improve the eurozone's crisis management."

Under the plan, the private sector will provide 135bn euros (£120bn) over the next 30 years through a variety of measures including a debt buy-back programme.

As well as the buy-back scheme private sector creditors will be offered three other ways to help cut Greece's debt pile by 13.5bn euros (£11.9bn).

The agreement will also see the role of region's bailout system, the European Financial Stability Facility (EFSF), being expanded.

The move is aimed at allowing the EFSF to move more quickly and so react to problems before they become too severe.

It is hoped that the announcement will help to calm fears that the eurozone debt crisis will spread to the much larger economies of Italy and Spain.

Immediately after the plan was revealed the euro rose against other world currencies and share prices also made gains.

Statement by President Barroso following the meeting of the Heads of State or Government of the Euro area


Good evening Ladies and Gentlemen,

You will see the very ambitious package that we have just adopted. Let me first of all inform you that tomorrow there will be Technical Briefing in the Commission (in Berlaymont) at 1 o'clock p.m., so I am not going now in details. Following the presentation made now by the President of the European Council let me highlight what I believe are the most important political aspects.

I think that it is the first time since the beginning of this crisis that we can say that politics and the markets are coming together.

Yesterday, I made a statement where I said we had 24 hours to respond to a very serious situation that put at risk the financial stability in the Eurozone. And I said that the minimum we needed to do was provide clarity on five central issues. Not only this has been achieved, we have now a very credible package.

Firstly, measures to substantially improve the sustainability of Greek public finances. The lowering of interest rates and the extension of maturities are an essential element in this respect. This is true both for public support and private sector involvement. This of course requires full implementation of the Greek macroeconomic adjustment programme. It is of course a two-way street. Prime Minister Papandreou gave in very clear terms his assurances in this respect.

Secondly, feasibility and limits of Private Sector Involvement (PSI). We now are clear about what we mean by PSI and to whom it applies. It is a voluntary approach by the private sector and it therefore is a solution with the markets, not against them. Importantly, we are crystal clear that PSI is for Greece, and Greece alone. It is an exceptional solution which we exclude for others. It is a unique solution.

Thirdly, scope for more flexible action through the European Financial Stability Facility (EFSF). We have agreed an ambitious reform of the EFSF making it more flexible and effective, as we had asked back in January in the 2011 Commission Annual Growth Survey. We are lowering the lending rates, extending the maturities and allowing it to do more, including intervention on the secondary markets apart from intervention with a precautionary nature. This means that we will be in a position to act whenever damage threatens. Unlike before, when we needed to wait for substantial damage to occur before we could intervene.

Fourthly, repair of the banking sector still needed. The second EU-wide stress test was published on 15 July. It revealed remaining pockets of vulnerability in the European banking system. We give the markets a credible commitment to recapitalise those banks which have failed or nearly failed the test.

Fifthly, measures to ensure the provision of liquidity to our banking system. There can be no comprehensive solution to the sovereign crisis without the full support of the European Central Bank and the Eurosystem. And we have this today.

I also made clear that we needed to boost the chances of growth in Greece. Heads of State and Government have welcomed the Commission's decision to create a Task Force for Greece to provide technical assistance to help Greece implement its reforms and mobilise and better target structural funds: this, together with the programme for Greece, is what we have referred to in the meeting as a European kind of Marshall Plan, where we will ask Member States and the European Investment Bank to give a contribution.

I also called for a clear and unequivocal signal that the Council will conclude the economic governance package with the European Parliament. Today we have this. All Member States of the Euro area said they will come to an agreement with the Parliament. I am particularly pleased that the final deal will be extremely close to the original Commission proposal.

Finally, e also endorsed the line of reducing the over reliance on external credit ratings. As you know just yesterday the Commission presented a first step in that direction and we will come forward in the autumn with further proposals.

So, ladies and gentlemen, we needed a credible package: we have a credible package.

It deals with both the concerns of the markets and of citizens. It responds also to the concerns of all Member States of the Euro area. It is a package that every government has signed up to. For the first time in the crisis, the politics and the markets are coming together.

Now I expect every one of them to go out and defend and implement with determination this package.

Thank you.

A draft of the eurozone proposal document has been leaked from the summit in Brussels. We publish it in full here.
STATEMENT BY THE HEADS OF STATE OR GOVERNMENT OF THE EURO AREA AND EU INSTITUTIONS

Since the beginning of the sovereign debt crisis in the euro area, important measures to stabilize the euro area, reform the rules and develop new stabilization tools have been taken. The recovery in the euro area is well on track and the euro is based on sound economic fundamentals. But the challenges at hand have shown the need for more far reaching measures. We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole. We also reaffirm our determination to reinforce convergence, competitiveness and governance of the Euro area.

Today, we agreed on the following measures:

Greece:

1. We welcome the measures undertaken by the Greek government to stabilize public finances and reform the economy as well as the new package of measures recently adopted by the Greek Parliament. These are unprecedented, but necessary efforts to bring the Greek economy back on a sustainable growth path.

2. We agree to support a new programme for Greece and to provide an additional amount of up to [xx] ¤. This programme will be designed, notably through lower interest rates and extended maturities, to decisively improve the debt sustainability and refinancing profile of Greece. We call on the IMF to contribute to the financing of the new Greek programme in line with current practices.

3. We have decided to lengthen the maturity of the EFSF loans to Greece to the maximum extentpossible from the current 7.5 years to a minimum of 15 years. In this context, we will ensure adequate post programme monitoring. We will provide EFSF loans at lending rates equivalent tothose of the Balance of Payment facility (currently approx. 3.5%) without going below the EFSF funding cost. This will be accompanied by a mechanism which ensures appropriate incentives to implement the programme, including through collateral arrangements where appropriate.

4. We call for a comprehensive strategy for growth and investment in Greece. Structural funds should be re-allocated for competitiveness and growth under a European "Marshall Plan". MemberStates and the Commission will mobilize all resources necessary in order to provide exceptional technical assistance to help Greece implement its reforms.

5. Greece is in a uniquely grave situation in the Euro area. This is the reason why it requires an exceptional solution. The financial sector has indicated its willingness to support Greece on a voluntary basis through a menu of options (bond exchange, roll-over, and buyback) at lending conditions comparable to public support with credit enhancement.

6. All other Euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all theircommitments to sustainable fiscal conditions and structural reforms. The Euro area Heads of Statesor Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the Euro area as a whole.

Stabilization tools:

7. To improve the effectiveness of the EFSF and address contagion, we agree to increase the flexibility of the EFSF, allowing it to:
- intervene on the basis of a precautionary programme, with adequate conditionality;
- finance recapitalisation of financial institutions through loans to governments including in non programme countries;
- intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional circumstances and a unanimous decision of the EFSF Member States.

Fiscal consolidation and growth in the euro area:

8. We welcome the progress made on the implementation of the programmes in Ireland and Portugal and reiterate our strong commitment to the success of these programmes. The EFSF lending conditions we agreed upon for Greece will be applied also for Portugal and Ireland. In this context, we note Ireland's willingness to participate constructively in the discussions on the Consolidated Common Tax Base draft directive (CCTB) and in the structured discussions on tax policy issues in the framework of the Euro+ pact framework.

9. All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest. In this context, we welcome the budgetary package recently presented by the Italian government which will enable it to bring the deficit below 3% in 2012 and to achieve balance budget in 2014. We also welcome the ambitious reforms undertaken by Spain in the fiscal, financial and structural area. As a follow up to the results of bank stress tests, Member States will provide backstops to banks as appropriate.

10. We will implement the recommendations adopted in June for reforms that will enhance our growth. We invite the Commission to enhance the synergies between loan programmes and EU funds in all countries under EU/IMF assistance. We support all efforts to improve their capacity to absorb EU funds in order to stimulate growth and employment.

Economic governance:

11. We look forward to the rapid finalization of the legislative package on the strengthening of the stability and growth pact and the new macro economic surveillance. Euro area members will do their utmost to help reaching agreement with the EP on voting rules in the preventive arm of the Pact.

12. We commit to introduce legally binding national fiscal frameworks as foreseen in the fiscal frameworks directive by the end of 2012.

13. We agree that reliance on external credits ratings in the EU regulatory framework should be reduced, and look forward to the Commission proposals in this respect.

14. We invite the President of the European Council, in close consultation with the President of the Eurogroup, to make concrete proposals by October on how to better organize crisis management in the euro area and improve working methods.

We call on the Eurogroup to implement expeditiously and as a matter of priority the decisions taken today.