BRUSSELS (MNI) – European leaders have agreed bold measures that
will help make the Greek debt situation sustainable and protect other
Eurozone member states from contagion, German Chancellor Angela Merkel
said early Thursday morning.

“I am very aware that the world was closely monitoring these
negotiations. Europe has shown that it is taking the right steps,” she
said following negotiations with the Eurogroup, the International
Monetary Fund, the European Central Bank, and the International
Institute of Finance.

One important step is the new plan for private sector involvement
that will “bring Greece back on a sustainable path” by holding Greek
debt to 120% of GDP by 2020.

To achieve this, the private sector investors will take a 50%
haircut on its debt holdings, Merkel said. In return, the official
sector will give E30 billion in guarantees to the private sector
investors. It will also offer Greece a new programme running until 2014
worth some E100 billion.

The new programme “will be subject to stronger monitoring” and the
Troika — the EU, the ECB and the IMF — will have a permanent presence
in Greece to ensure that all required policies are being implemented,
Merkel said.

Unlike previous programmes, the new E130 billion deal will be fully
financed via the Eurozone’s bailout fund, the European Financial
Stability Fund (EFSF), Merkel said.

The decision to tap the EFSF for the new Greek programme may face
some criticism, as the EFSF’s finances are already considered too
limited for the vast range of issues — including possible bank
recapitalization, government bond buying and credit lines — it is
expected to address.

Merkel sought to assure that the resources available to the fund
will be boosted “significantly.” The chancellor said that she expects
the untapped resources of the EFSF to be leveraged by four or five times
its current value to around E1 trillion, but said more concrete figures
would have to wait until the November.

“I am confident that it will be strong enough to protect the euro,”
she said.

A larger Greek haircut would have to be accompanied by much
stronger EFSF firepower to protect other Eurozone countries from
possible contagion risks, policy makers has stressed repeatedly ahead of
the meetings.

Two countries that are particularly vulnerable to contagion are
Italy and Spain. Merkel said that both countries had promised new
measures to improve their competitiveness and improve the state of
public finances.

Italy, in particular, had explicitly “invited” the Commission to
“closely monitor” the implementation of new measures and agreed to make
all necessary information available, Merkel said.

Merkel also stressed that the ECB will not be asked to contribute
to leveraging the EFSF and said that no other burdens had been placed
on the central bank.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

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