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EU leaders clinch debt crisis deal

After more than eight hours of heated talks that went to the brink of collapse, European leaders yesterday hammered out a financial rescue plan for the euro that they hope will stave off a double-dip recession.

After more than eight hours of heated talks that went to the brink of collapse, European leaders yesterday hammered out a financial rescue plan for the euro that they hope will stave off a double-dip recession.

AFTER more than eight hours of heated talks that went to the brink of collapse, European leaders yesterday hammered out a financial rescue plan for the euro that they hope will stave off a double-dip recession.

The deal includes creditors reluctantly agreeing to halve Greek debt, a plan to recapitalise the region's banks to protect them against losses and the boosting of the main bailout fund into a ?1 trillion ''bazooka''.

The plan aims to quarantine Greece and prevent speculation against Italy, Spain and France from ravaging the euro zone and wreaking global economic havoc. The crisis had threatened to break up the single currency, which has been the subject of 14 summits in the 18 months since the sovereign debt crisis began.

French President Nicolas Sarkozy told reporters in the early hours of yesterday morning (Brussels time): ''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.''

European Commission President Jose Manuel Barroso said: ''These are exceptional measures for exceptional times ? Europe must never again find itself in this situation.''

Greek Prime Minister George Papandreou said: ''We can claim that a new day has come for Greece, and not only for Greece but also for Europe.''

The crucial element of banks accepting losses on Greek government bonds hit the wall part-way through the Brussels talks, with the banks' negotiator, Charles Dallara of the Institute for International Finance, issuing a statement saying there was ''no agreement on any element of a deal''. The banks reportedly yielded after Germany threatened them with ''the nuclear option'' of Greek bankruptcy.

Luxembourg Prime Minister Jean-Claude Juncker said the banks' resistance was broken by a threat ''to move towards a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks''.

The plan reduces Greece's debt burden by ?100 billion ($A134 billion), which means its debts should be 120 per cent of gross domestic product by 2020, down from 160 per cent now.

Banks will be required to raise about ?106 billion in new capital by next June. The fine print on the Greek package would be worked out by the end of the year, Mr Barroso said.

European Union finance ministers are expected to decide in November on the detail of measures to increase the size of the bailout fund, the European Financial Stability Fund. They include the creation of special purpose investment vehicles to attract money from sovereign wealth funds and other sources.

Mr Sarkozy said he would talk to Chinese President Hu Jintao in the next few days about attracting Chinese investment to the fund.

Euro-zone leaders also demanded Italy take more action on austerity. Prime Minister Silvio Berlusconi has promised to raise the retirement age to 67 and take other measures.

British Prime Minister David Cameron was due to leave Brussels for Australia for the Queen's opening of the Commonwealth Heads of Government Meeting in Perth today.

With BLOOMBERG


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