BC-EU--Europe-Financial Crisis, 4th Ld-Writethru,0913

Eurozone leaders: Greece plan to stabilize euro

AP Photo VLM136, VLM133, VLM128, VLM123

BRUSSELS (AP) -- European leaders on Friday said their hard-won deal to rescue debt-ridden Greece after months of bitter wrangling will help calm jittery markets and stabilize the euro, but market reaction was cautious and experts warned much of the damage has already been done.

Leaders of the 16 eurozone countries agreed Thursday to a plan to rescue Greece if it finds itself unable to borrow. The deal would provide individual loans from other eurozone countries and funding from the International Monetary Fund. However, it sets out strict conditions, saying it could only be used as a last resort, and requires unanimous agreement of all eurozone members.

The day after the announcement, the euro recovered from a 10-month low against the U.S. dollar, to $1.3374 in midday trading in Europe from below $1.33 on Thursday.

But while the leaders hailed their plan, analysts remained cautious, noting dangers still lie ahead.

"The agreement last night ... clearly improves the country's financial outlook and could also ease some of the near-term pressure on the euro," said Jonathan Loynes, Chief European Economist at Capital Economics Ltd in London.

"But it would be wrong to think that the crisis is over. For a start, Greece is still going to have to pay a heavy price to meet its financing needs. Any loans would be at market interest rates, which are still very high. And more importantly, Greece still faces an extremely serious economic crisis," he said, noting that its economy would likely remain "stuck in a deep recession for some years."

Although the spread between Greek 10-year bonds and equivalent German issues -- a key indicator of market trust -- narrowed to 305 basis points Friday from about 330 on Thursday, the level remains high, translating to roughly twice Germany's borrowing rate.

Furthermore, Loynes said that with other eurozone countries such as Portugal and Ireland also facing long downturns to get out of fiscal trouble, "we suspect that any relief for the euro will be short-lived."

German Chancellor Angela Merkel, who had vociferously opposed an immediate bailout for Greece, said she was "very satisfied" with the outcome.

"I think that it demonstrated Europe's capability to handle things and at the same time did something for the stability of the euro and for solidarity with a country that is in difficulty," Merkel said Friday.

"For us, it is also important in the long term that the euro, which is such a success for peace and unity, remains stable. Yesterday was an important day for the euro," she said.

Moody's credit ratings agency, however, said that the political divisiveness among European leaders over how to handle the crisis had already damaged the region's credibility.

"The key credit question is whether, over the coming weeks and months, market confidence will be strengthened by the support package or whether it will be weakened by contentious conditions under which this package was agreed," said Pierre Cailleteau, managing director for sovereign risk at Moody's in London.

Although designed for Greece, the bailout program could also be used to help other vulnerable eurozone nations who have seen debt soar amid the global economic crisis.

Jean Claude Juncker, head of the eurozone finance ministers, said governments need to keep watching how currency and financial markets react.

"I personally think we took a good decision yesterday evening and that the financial markets will be reassured," he said.

He said no amount of a possible bailout for Greece was agreed upon, but two diplomats said that the total loans would be some euro22 billion.

Greece needs to borrow some euro54 billion this year and must refinance some euro20 billion in April and May. It has been able to sell bonds but says it cannot keep paying the high interest rates investors have been demanding.

The deal was a clear victory for Merkel, who demanded that aid only come as a last resort and must include the IMF.

It was also a comedown for the French and the European Central Bank, which had opposed turning to the IMF out of fear it would damage the euro's prestige and show that Europe was unable to solve its own financial woes. The eurozone has never turned to the IMF.

ECB President Jean-Claude Trichet said the deal was "a solution that preserves the responsibility of the governments of the eurozone." He praised it as a "workable solution" that would "normally not need to be activated."

French President Nicolas Sarkozy said the eurozone would offer around two-thirds of any loan package with the IMF taking the remaining third.

Greece shocked markets and other EU nations last year by admitting it had falsified statistics to make its budget deficit look lower.

Its 12.7 percent deficit for 2009 is four times over the EU limit, showing up the eurozone's inability to restrict members' debt and deficits. Worries of a Greek default also highlighted the lack of a safety net for eurozone countries that can't pay their bills.

The new plan, to which contributions would be voluntary -- sets up a possible rescue program for the first time.

Eurozone nations have also called for tougher rules and sanctions. Van Rompuy has been tasked with drawing up possible options to toughen EU oversight of budgets and economic performance.

The Greeks were relieved, with Prime Minister George Papandreou saying Europe had "taken a great step" to protect Europe's currency Union.