EUROPEAN leaders have agreed on a ?130 billion ($A160 billion) bailout for the Greek economy, averting the immediate threat of bankruptcy and of Greece being forced out of the euro zone.
But the deal depends on Greece implementing further tough austerity measures, ensuring more hardship for Greeks already suffering from the effects of massive spending cuts and economic chaos.
The deal, concluded after marathon overnight talks in Brussels, includes a major write-down of debt owed to private investors, who have accepted a "haircut" of more than ?100 billion or 53.5 per cent of their holdings.
The deal 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 2010 bailout. 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.
The austerity program has seen support for Greece's two main political parties, Socialist Pasok and its conservative coalition partner New Democracy, plummet to the lowest levels recorded.
In Athens, residents were cynical about the outcome. Said Spyros Papadopoulos, an employee at a cosmetics company: "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 nobody's 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.
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 troika's 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.
The report suggested Greece would need additional help to cut its debts to 120 per cent of GDP by 2020, and that Greek banks would need as much as ?50 billion in recapitalisation rather than ?30 billion.