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EU leaders agree to treaty change

BRUSSELS, Belgium — European Union leaders agreed Thursday to tweak EU treaties to set up a new mechanism to deal with future euro crises, amid mounting pressure to come up with a comprehensive response to tackle the region’s crippling debt woes.

BRUSSELS, Belgium — European Union leaders agreed Thursday to tweak EU treaties to set up a new mechanism to deal with future euro crises, amid mounting pressure to come up with a comprehensive response to tackle the region’s crippling debt woes.

A German official said EU leaders agreed that “the member states whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro as a whole.” The official spoke on condition of anonymity at an EU summit in Brussels on Thursday.

Any new aid to heavily indebted countries under the new mechanism would be “subject to strict conditionality,” the official said.

Now it is up to finance ministers of the 27 EU nations to work out details of the new mechanism, to take effect after a temporary plan expires in 2013.

European heads of state and government are divided on whether new, bolder moves were necessary to contain the crisis.

Further measures — such as boosting the size of the region’s C750 billion ($992.85 billion) bailout fund or introducing pan-European bonds — had a slim chance of success, after being blocked by Germany, Europe’s biggest economy.

The political deadlock came as further questions arose over the measures policy makers were counting on to keep market turmoil at bay, namely pushing highly indebted countries to get their finances in order and having the ECB buy up vulnerable bonds to stabilize borrowing costs.

Moody’s Investors Service warned that “a multi-notch downgrade” of Greece’s bonds was possible, since the country’s debt turned out to be even bigger than expected. Greece was only saved from default in May by a C110 billion rescue loan from other euro-zone nations and the International Monetary Fund.

The rating agency warned that support for the struggling nation might be less strong in the future than it had previously assumed, since it depended to Athens’s ability to implement painful austerity programs and in how far bondholders would have to share the burden of any bailouts after 2013.

The euro zone’s current bailout fund runs out in June 2013 and its successor, the so-called European Stability Mechanism that European leaders were debating Thursday in Brussels, could force losses on private creditors the next time a country runs out of money.

Although EU officials have stressed that existing debts won’t be affected by the new mechanism, many economists have warned that it will be impossible for Greece to garner sufficient economic strength to pay off its debt load — expected to reach 156 per cent of gross domestic product in 2013.