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From left to right: Nicolas Sarkozy, French President, Georgios Papandreou, Greek Prime Minister and Angela Merkel, German Federal Chancellor and Europe's principal paymaster, at the EU summit in Brussels, March 25, 2010. The stern looking Dr. Merkel appears to be telling Papandreou, that he is on his last chance.
After weeks of confusion, Eurozone leaders on Thursday evening agreed a rescue package for Greece, which includes the involvement of the International Monetary Fund (IMF).
“We hope that it will reassure all the holders of Greek bonds that the Eurozone will never let Greece fail,” said Herman Van Rompuy, president of the European Council, at a press conference. “If there were any danger, the other members of the Eurozone would intervene.”
Earlier on Thursday, France and Germany agreed on the mechanism of a rescue and support would be only provided as a "last resort" Van Rompuy said. The president said Eurozone leaders had agreed to an average interest rate for any loans the countries offer Greece. While he didn't disclose this rate, it is understood that the level will be geared towards encouraging Greece to return to financial markets quickly.
With this agreement, a "majority" of Eurozone states - - participation is voluntary - - will contribute the largest part should Greece eventually need help. That is, if it does not succeed in obtaining loans in the financial markets.
French President Nicolas Sarkozy said the proportion of funding would be one-third IMF and two-thirds from the Eurozone.
Jean-Claude Trichet, president of the European Central Bank, who had earlier opposed IMF involvement, said he was “entirely content” with the deal, which he said preserved the responsibilities of European governments.
Also on Thursday, at a plenary session of the European Parliament, President Trichet said it is the intention of the ECB’s Governing Council to keep the minimum credit threshold in the collateral framework for lending to Eurozone banks at investment grade level (BBB-) beyond the end of 2010. In parallel, the ECB will introduce, as of January 2011, a graded haircut schedule, which will continue to adequately protect the Eurosystem.
There were fears that if Moody’s Investors Service, joined Standard & Poor's and Fitch in lowering its rating on Greek debt, Greece's banks would be excluded from ECB funding.
France and Germany also proposed the formation of an “economic government” for the European Union on Thursday night, to promote better co-ordination of economic policy.
However, to head off a backlash from anti-EU elements in the UK, the British Prime Minister Gordon Brown succeeded in changing the wording in the communiqué from economic government to economic governance.
Greece has to raise new funding of over €20bn in the next two months and Germany's 10-year bund rate of 3.06% compares with Ireland's equivalent of 4.48% and Greece's 6.36%.
Greek Prime Minister Georgios Papandreou had been seeking to reduce the interest rate burden as a severe austerity program is partially funding higher rates, which is a situation not that different to the funding of €9bn that is needed for the Irish State-owned former builders' bank, Anglo Irish.
Earlier Thursday, German Chancellor Angela Merkel told the Bundestag in Berlin that she was acting in the European interest and Germans had given up the Deutschmark as a result of the promise that the euro would be just as strong.
She said it was imperative for any German government “that this trust was not breached in any way whatsoever” and that she would act accordingly in Brussels.
Taoiseach Brain Cowen arriving for the EU summit in Brussels, March 25, 2010, carrying some reading material.
According to the joint statement of the Heads of State and Government of the Eurozone countries, each country will contribute an amount proportional to its gross domestic product and its total population. The decision to intervene with these loans must be adopted unanimously by the sixteen common currency area members, including those which are not taking part in the bailout.
The European Commission and the European Central Bank will be responsible for monitoring Greece's compliance with all the conditions imposed for the different loans it receives. In tandem with this, the agreement provides for a strengthening of the Stability Pact (fiscal supervision of euro member countries, including penalties for non compliance with the conditions of the Pact).
The Eurogroup meeting took place during a break in the spring European Council, in which the "Europe 2020" economic growth strategy is being studied.
CNBC spoke to Valdis Dombrovskis, the prime minister of Latvia, Andrus Ansip, the prime minister of Estonia, Dalia Grybauskaite, the president of Lithuania and Matti Vanhanen, the prime minister of Finland, before the rescue announcemnt: