Eurozone leaders craft Greece rescue, amid default risk

The eurozone will provide Greece with fresh loans, take steps to reduce the country's 350-billion-euro debt and open the door for the private sector to contribute to a second bailout, according to a draft agreement which eurozone leaders – including Maltese Prime Minister Lawrence Gonzi – are reportedly agreeing to.

"We agree to support a new programme for Greece," said the draft accord being considered during the summit. "Greece is in a uniquely grave situation in the euro area. This is the reason why it requires an exceptional solution."

The programme would provide loans with lower interest rates and longer repayment deadlines "to decisively improve the debt sustainability and refinancing profile of Greece."

The 17-nation bloc will offer similar improved loan terms to two other bailed out nations, Portugal and Ireland, the draft said.

Diplomats said the eurozone and International Monetary Fund were considering providing rescue aid worth €71 billion, not including a possible contribution from the private finance sector. The draft text did not specify a sum.

As the leaders huddled behind closed doors as they looked to sign off an agreement, stock markets and the euro shot up. They had earlier sunk on a warning that Greece could face some form of default under the new rescue package.

"We cannot exclude any possibility and everything should be done to prevent (a default)," said Luxembourg Prime Minister Jean-Claude Juncker, head of the Eurogroup of finance ministers, on arrival for the Brussels summit.

Juncker insisted that the single currency was "not in danger" following weeks of market turbulence driven by fears the crisis was dragging down Italy and Spain and could spread across the world.

A breakthrough became possible after the eurozone's two powerbrokers, German Chancellor Angela Merkel and French President Nicolas Sarkozy, reached a compromise just hours before the summit.

After unsettling markets earlier this week by downplaying hopes of a "spectacular" deal, Merkel was upbeat that an accord would be reached to "attack the root of the problems" of Greece's weakness.

Leaders dropped the idea of a bank tax to help fund a second Greek bailout but kept German demands for private sector involvement, even at the risk of triggering a default, diplomats said.

There are concerns that any change to the terms of outstanding Greek sovereign bonds could prompt rating agencies to declare Athens in default, with potentially dramatic knock-on consequences.

The draft said private bondholders would be given three choices -- a partial buyback of Greek debt, exchanging Greek bonds for new ones with longer maturities, or a "rollover" in which creditors reinvest in new Greek bonds.

Diplomats also said leaders proposed using eurozone crisis funds to guarantee Greek bonds during a default in order to protect private banks that hold them, and ensure they still have access to European Central Bank funds.

The European Union and IMF's €110 billion bailout of Greece last year has proved insufficient and since then, Ireland and Portugal have received their own multi-billion-euro rescues.

To ease the three bailed-out countries, loans to them may be extended from 7.5 years to 15 years while the rates they pay would be lowered from 4.5 percent to 3.5 percent, the draft said.

Financial markets reacted with relief, with Europe's main stock markets all closing higher and the euro briefly topping US$1.44 today.