[Watch] Eurozone leaders reach agreement on bold euro rescue plan

Officials in Brussels said an accord had been reached with banks on a 50% write-off of €100 billion of Greek debt.

They have also approved a complex mechanism for "leveraging" an existing bailout fund to boost its firepower.

Reluctant banks had offered 40%, but German chancellor Angela Merkel and French president Nicolas Sarkozy insisted that the sector had got off relatively lightly in the crisis so far, with taxpayers bearing the brunt of bailouts.

They said banks should be prepared to forgo a significant level of Greek repayments to help ease the crisis.

It means that, coupled with an earlier decision to recapitalise vulnerable banks, the summit has delivered on the package it promised.

It was also agreed to increase the €440 billion bailout fund, perhaps to over €1 trillion.

This would help protect larger economies such as Italy and Spain from the market turmoil that has already pushed three countries to need bailouts.

Although no figures are included about the size of the bailout, experts are already warning that the recapitalisation, obliging some banks to boost liquidity by €100 billion, will not be enough.

EU President Herman Van Rompuy said the deal will reduce Greece's debt to 120% of its GDP in 2020.

Under current conditions, it would have grown to 180%.

Greece's prime minister George Papandreou said the deal heralded a "new era" for his country.

"These are exceptional measures for exceptional times. Europe must never find itself in this situation again," European Commission President Jose Manuel Barroso said after the meetings.

French President Nicolas Sarkozy told reporters: "We have reached an agreement which I believe lets us give a credible and ambitious and overall response to the Greek crisis.

"Because of the complexity of the issues at stake, it took us a full night. But the results will be a source of huge relief worldwide."

Earlier

European Union leaders reached agreement on a plan to recapitalise Europe's biggest banks, in a bid to contain the effects of any further shocks in the eurozone.

The plan entails that big European banks will be required to have “9% of the highest quality capital” by June 2012, measured against assets, EU President Herman Von Rompuy said, adding that the banks should raise capital from the private-sector where possible.

However, where that proves impossible, member states will be obliged to provide capital in exchange for equity.

The eurozone's rescue fund, now known to be the European Financial Stability Facility (EFSF), could be used as a last resort.

In a statement issued by EU leaders at the end of their meeting, it was said that guarantees were needed for banks' liabilities to ensure that they could obtain medium-term funding.

They have asked the European Commission to work with the European Banking Authority, the European Investment Bank and the European Central Bank to explore options for a co-ordinated EU approach.

Polish Prime Minister Donald Tusk, who currently heads the EU’s rotating presidency, said that the plan was adopted “after a short, heated debate” among the 27 leaders, before the eurozone leaders began their own meeting.

“An emotional element during the debate was the fact that this is not a permanent element,” Tusk said, referring to the “exceptional circumstances” that had made such a move necessary. “This will not be a permanent solution for the future.”

Although neither Tusk nor Van Rompuy gave a figure for the recapitalisation needs of EU banks, the total is expected to be around €109 billion.

Regarding the prospects for a comprehensive crisis response being finalised by eurozone leaders tonight, Tusk said: “I think we are very close to a full political agreement. However, there are some important details that might require some more debate. We need to be patient.”

But Tusk also stressed that the bank recapitalisation plan was part of the overall crisis response. “The recapitalisation of banks will work only when the euro area approves other elements that are currently being debated,” he said. “The bank recapitalisation without the remaining elements, without the firewall, wouldn't have any chance of success.”

Tusk said that Italian Prime Minister Silvio Berlusconi , had submitted a letter to the group to inform them of his government's austerity measures. Tusk said that the letter included a “detailed work plan” from the government and was “very well received”.

British Prime Minister David Cameron said: “We've made good progress on the bank recapitalisation, it wasn't watered down. But it will only go ahead when the other parts of the full package go ahead and further progress needs to be made tonight.”

Cameron was one of the leaders of non-eurozone countries who had insisted on a full Council meeting before the summit of eurozone leaders.