EUROPEAN leaders have agreed on a ?130 billion ($A161 billion) bailout for the collapsing Greek economy, averting the immediate threat of default on its massive loans.
But the deal is conditional on Greece implementing further austerity measures, which will bring more hardship to a nation already traumatised by spending cuts and recession.
The deal, concluded after marathon overnight talks in Brussels, includes a major write-down of debt owed by Greece to private investors, who have accepted a "haircut" of more than ?100 billion or 53.5 per cent of their holdings.
It also includes provisions to ensure loan money be "ring-fenced" so it can be clawed back if Greece fails to make further savage spending cuts.
The deal is double the size of the last bailout in 2010. Without it Greece, facing debt repayments of ?14.5 billion by March 20, would have gone bankrupt.
Greek Prime Minister Lucas Papademos hailed the breakthrough, calling it a "historic day" for Greece. Finance Minister Evangelos Venizelos said the agreement would allay fears that Greece would be forced out of the euro zone.
But its terms will mean decades of hardship for Greeks, a third of whom are already in poverty as the economy reels from massive cuts to government spending, jobs and wages. Greece has 48 per cent youth unemployment and its suicide rate has doubled since 2008.
The deal must survive further hurdles over the next month as it faces ratification by individual European Union parliaments and a stormy response from protesting Greeks, who have been rioting in the streets of Athens as the country endures a fifth year of recession.
Under the agreement, the Greek government has agreed to an extra ?325 million in spending cuts. Mr Papademos is expected to push through emergency legislation today that will further slash pensions and wages. In longer-term measures, 150,000 civil servants will be axed and labour laws ditched.
In Athens, residents were cynical about the outcome. Spyros Papadopoulos, an employee at a cosmetics company, said: Default is inevitable and all these sacrifices will be for nothing.
Our economy has collapsed and everybody knows it, said Katerina Freri, a civil servant at the Finance Ministry until her retirement this year.
Officially we have not gone bankrupt because it is in nobodys interest for us to go bankrupt and in Europe they fear the domino effect. But, unofficially, bankrupt is what we are, and at some point they will say it and there will be chaos here.
Euro zone leaders fear that if Greece defaults on its debt it would trigger a chain reaction of economic collapses across the EU and destroy the euro.
Dutch Finance Minister Jan Kees De Jager suggested that the troika overseeing the new bailout deal the International Monetary Fund, the European Central Bank and the European Commission permanently supervise taxation and spending in Athens.
Austrian Finance Minister Maria Fekter ruled out the idea. We cannot usurp the budget sovereignty of parliaments . . . But one can very well link the aid one gives to conditions.
The deal brings the total funds committed to save Greece, Ireland and Portugal to at least ?386 billion. But the latest bailout is unlikely to be enough to save Greece. A report by the troikas own analysts warned that Greek debt could reach an astronomical 160 per cent of its gross domestic product by 2020 if its recession deepens and structural reforms are not made.