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Europe nears agreement on Greek crisis bailout

BRUSSELS, Belgium — Greece would get some relief on part its massive debts and a Europe-wide rescue fund would gain new powers to swiftly aid other debt-stricken countries under a sweeping deal being negotiated by eurozone leaders Thursday.

BRUSSELS, Belgium — Greece would get some relief on part its massive debts and a Europe-wide rescue fund would gain new powers to swiftly aid other debt-stricken countries under a sweeping deal being negotiated by eurozone leaders Thursday.

Though the deal would likely trigger a temporary default by Greece — the first ever by a euro state — it could also help the ailing country emerge from its debt hole in the longer term and shake up Europe’s way of handling the crisis, by making it more proactive.

Stocks, bonds and the euro rallied sharply on hopes that the deal will be a turning point in the eurozone’s 18-month debt crisis. Growing market panic has weighed on the single currency and forced already bailed out Greece, Portugal and Ireland as well as struggling Spain and Italy to make billions of euros in cuts.

A draft of the deal seen by The Associated Press said that banks and other private investors that own Greek bonds have agreed to contribute to the rescue of the country — language indicating that they will accept being paid back more slowly or at lower interest rates.

This could happen through banks trading their current bonds to Greece for new ones that mature years later. The banks could also sell their bonds back to Greece at a loss.

Ratings agencies have long warned that such measures would be seen as a form of Greek default on its loans, a first for a eurozone country and a potential cause of devastating loss of confidence in the other heavily indebted nations.

Markets appeared to be seeing the draft measures as less harmful than expected, however, fueling the rally.

“Greece is in a uniquely grave situation. This is the reason why it requires an exceptional solution,” the draft says.

The draft deal, if approved, would also radically overhaul a bailout fund created last year after Greece was bailed out with C110 billion ($156 billion) in rescue loans by the other eurozone countries and the International Monetary Fund. Like Greece, Ireland and Portugal have since found themselves increasingly unable to sell bonds with sharply higher rates demanded by investors frightened that their struggling economies would leave them unable to repay their debts.

But so far the European Financial Stability Facility could only be tapped once a country was on the brink of financial collapse and after it agreed to huge cuts and changes to the way its economy is run.

The deal would now allow the EFSF to intervene pre-emptively, before a country is in full-blown crisis mode.

For instance, countries could be given a “precautionary program,” likely some form of credit line. That might allow states under stress, like Spain, to continue raising money on the markets, giving an extra assurance to investors, and could also make it easier for Ireland and Portugal to re-enter the markets once their bailout programs expire.

Money from the EFSF could also be used in some situations to recapitalize banks in countries that have not yet been bailed out, the draft says.

On top of that, the draft says, the EFSF could be authorized to buy up bonds of troubled countries on the open market, maintaining the prices of the bonds and keeping their interest rates from skyrocketing in the face of pressure from worried investors.

A eurozone official told The Associated Press that the draft was “definitely not final” and that “anything can change,” speaking on condition of anonymity because of the sensitivity of the negotiations.

Even though initial market reaction to the draft deal was positive, the euro traded up 0.8 per cent at $1.4371 after it had slumped earlier in the day, analysts warned that it won’t constitute a turning point in the eurozone’s debt travails.

“From what we can see, there are still couple of major shortcomings,” Jonathan Loynes, chief European economist at Capital Economics in London, said in a note. The deal would reduce Greece’s near-term financing needs, but won’t significantly lower the overall debt burden, Loynes said, adding that “there is no ’shock and awe’,” that would boost market confidence in the eurozone as a whole.

A major fear about a potential Greek bond default has been the potential for massive disruption to the Greek banking system. Greek banks use Greek government bonds that they own as collateral for short-term loans they receive from the European Central Bank.

That money funds the banks’ day-to-day operations, including short-term loans to private businesses.

A default would render the bonds useless as collateral, causing that funding to dry up and wreaking havoc on the Greek economy.

To prevent that, the eurozone could provide some form of repayment guarantee or collateral for the new Greek bonds banks would take on, the draft says.

According to the draft, the eurozone and the International Monetary Fund are also ready to give new rescue loans to Greece, without providing a number.

Eurozone leaders also plan to ease the loan conditions for their part of the bailout, by doubling the average loan maturity for Greece to at least 15 years from 7 1/2 years currently and reduce the interest rate to 3.5 per cent.

Those softer loan conditions would also apply to Ireland and Portugal.