European heads of state reached an agreement last night on a desperate rescue plan for debt-ridden Greece, the second in 14 months, aimed at preventing the financial crisis from spreading to much larger economies.
A draft deal put to leaders of 17 eurozone nations at an emergency summit in Brussels provided for longer repayment periods for Greece's bonds and reduced interest rates for loans.
Officials close to the summit said the proposals would allow Athens to enter into "selective default" on part of a debt estimated at €350 billion (Dh1,847bn).
Although that default is intended to be temporary, it represents a significant departure from previous, strongly held positions.
But European markets rose and the euro strengthened as news filtered from the Belgian capital that agreement was within reach.
The proposals also call for a sweeping overhaul of the European Financial Stability Facility (EFSF), which provides bailout funds, with new powers to step in and prevent countries slipping into comparable crises. The draft document presented to delegates is believed to propose approval of a second Greek bailout, of €115bn (Dh607bn). The first package, agreed in May 2010, provided a slightly smaller sum.
The new deal will be financed from the EFSF rescue facility and the International Monetary Fund, with input from private-sector holders of Greek bonds.
The proposals are designed to avoid contagion - the spread of the debt crisis to other parts of the eurozone - and are also intended to establish a process for lower interest, long-term loans to be made to countries facing trouble.
Among the key points, the draft document sought later maturity of eurozone loans to Greece to the maximum extent possible, from the current 7.5 years to a minimum of 15 years, and a European "Marshall Plan" providing a comprehensive strategy for growth and investment in Greece, with structural funds reallocated for competitiveness and growth.
Concessions on loan interest would also apply to Ireland and Portugal, which have benefited from other bailouts. The new rate was said to be 3.5 per cent compared with between 4.5 and 5.8 per cent now charged on international aid to Athens.
But the document stressed the special-case status of Greece, declaring: "Greece is in a uniquely grave situation in the euro area. This is the reason why it requires an exceptional solution."
Eurozone leaders had gathered with the words of the European commission president, José Manuel Barroso, ringing in their ears: "Nobody should be under any illusion. The situation is very serious. It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond."
For many observers, the summit was potentially a last chance to save the euro itself. But the draft agreement came after tough talking between participating nations and the financial institutions.
Calls for a tax on banks, which had been strongly favoured by France, were apparently dropped amid fears that this could gravely undermine the private sector, possibly leading to a new banking crisis.
Germany opposed such a tax, believing the best way forward involved exchanging bonds for debt with long-term maturities. The German chancellor, Angela Merkel, has made concessions but appeared yesterday to have moved less than the French.
The European Central Bank (ECB) had initially opposed any proposed solution that would lead to Greek debt being declared in default by credit rating agencies.
But in the compromise that emerged yesterday, due in large part to common ground identified in protracted eve-of-summit talks between the French and German leaders, Nicolas Sarkozy and Mrs Merkel, the ECB accepted that Greece could slip into "temporary default".
At the heart of an anguished debate has been the desire to prevent the crisis running out of control and affecting other ailing eurozone states, especially those of Italy and Spain.
Dangers remain in the approach that eurozone leaders seemed poised to adopt, as was quickly noted in early reaction in the UAE.
Mahdi Mattar, chief economist and head of research of CPM Investment in Abu Dhabi, said: "The indirect impact [of a default] would be a significant increase in risk aversion. Since we are a frontier market, the inflow of funds would be reduced and local investors would be more cautious."
The draft agreement did acknowledge the need for tighter financial discipline through the eurozone.
It welcomed the budgetary package recently presented by the Italian government and designed to reach that target by next year and balance its books budget by 2014.
Some analysts argue that the second bailout may simply paper over the cracks in the Greek economy and still require tougher follow-up discussions on writing off chunks of its mammoth debt. There have been calls for closer integration of the fiscal policies of the 17 euro-area states.
But the risks to the European and perhaps global economy of failure to reach any accord in Brussels were broadly acknowledged.
Carl Weinberg, chief economist at High Frequency Economics, told CNN: "Everyone agrees that chaos will result if the summit fails to deliver a comprehensive, practical, scalable and affordable approach to resolving Greece's debt problems."