BRUSSELS: Greece headed on Friday towards the first default in the eurozone's history after European leaders struck a grand bargain with banks to save the single currency from an epic debt crisis.
The Fitch ratings agency signalled that the deal will trigger a "restricted" default of Greece because private creditors will take a loss of 21 percent in their Greek holdings as part of the rescue package.
The announcement was expected after eurozone leaders convinced banks to share the costs of a second Greek bailout, with governments and the IMF shelling out 109 billion euros ($157 billion) and private bondholders contributing another 50 billion euros.
"What we are spending now for Europe and the euro, we will get back even more," said German Chancellor Angela Merkel. "It is worth every effort."
"It is our historic duty to protect the euro," said Merkel, who had insisted on a private sector role in a new bailout despite opposition from the European Central Bank and France.
The leaders accepted the risk of a Greek default as part of sweeping measures agreed at an emergency summit on Thursday to protect and strengthen the eurozone after weeks of market pressure for them to contain the debt drama.
"The commitments made by euro area leaders at yesterday's summit represent an important and positive step towards securing financial stability in the euro zone," said David Riley, head of Fitch sovereign ratings.
The eurozone, which hopes the default will last just a few days, took steps to protect two other bailed out nations, Portugal and Ireland, by also extending to them longer loan repayment periods and lower rates.
The markets greeted the deal with relief as European stocks jumped on Friday while the borrowing costs of Greece, Ireland and Portugal fell sharply.
But investors remained cautious up as they warned of lingering uncertainties, one year after a first 110-billion-euro bailout failed to put Athens back on its feet.
"The agreement is moderately positive," Morgan Stanley said in a research note warning that the package buys Greece more time but does not materially improve its solvency over the next few years.
"On balance, we would therefore view this as a step forward rather than the ultimate solution to the euro area sovereign debt crisis."
Greece debts of about 350 billion euros, or 160 percent of Gross Domestic Product. The deal agreed on Thursday will reduce it by 26 billion euros or some 12 percent, still leaving it way above the EU ceiling of 60 percent.
Agreement became imperative when the debt crisis looked as though it could snare Italy and Spain, the third and fourth-best eurozone economies.
A deal emerged after weeks of fractious debate as Germany, Europe's paymaster, the Netherlands and Finland insisted on private sector participation even at the risk of default.
France and the European Central Bank had opposed such a drastic scenario but a compromise was reached at an 11th-hour meeting between Merkel, French President Nicolas Sarkozy and ECB chief Jean-Claude Trichet late Wednesday.
Fitch indicated that once the bond swap conducted by banks is completed, it would issue fresh, likely higher ratings for new Greek bonds as the government's financial position is strengthened by the bailout.
The ECB secured a key demand for the the 17-nation eurozone's crisis fund to buy bad debt from struggling nations, a role the Frankfurt central bank had taken on alone until now.
Sarkozy said this amounted to "the initiation of a European monetary fund." He added: "Our ambition is to seize the Greek crisis to make a quantum leap in eurozone governance."
With pressure to address long-standing weaknesses, Sarkozy and Merkel said they would propose in the coming weeks an overhaul of economic governance in the eurozone -- a step towards deeper integration demanded by markets.
The single currency area was born in 1999 but without a common budgetary policy, other than debt and deficit rules, to prevent wayward spending as each state wanted to guard its fiscal sovereignty.
ING bank said that the new Greek package "is a positive development for the Euro area and it's a first step through the creation of a common fiscal and economic policy."
Copyright AFP (Agence France-Presse), 2011
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