EU leaders reach deal on debt crisis

By Philip Aldrick and agencies 

"The fundamental path was hacked open," German Chancellor Angela Merkel said.

Along the way, Mrs Merkel made some serious concessions, which might cost her when she faces her electorate at home.

Together with her eurozone counterparts, Merkel agreed to boost the region's bailout fund, the European Financial Stability Facility (EFSF), so it can lend the full €440bn (£380bn) that it initially promised.

Up to now, the EFSF was only able to lend about €250bn because of several buffers required to get a good credit rating - fanning fears that it would not be big enough to save a large country like Spain.

The fund will also be allowed to buy the bonds of governments in financial difficulties on the open market, but only if the respective country is locked into a national bailout program based on strict conditions.

That step marks an important expansion in the fund's powers, since buying bonds can help stabilize their prices and a country's funding costs.

However, it falls short of demands made by the EU's executive Commission as well as the European Central Bank (ECB), which wanted to see the fund take an even broader role, buying bonds to calm financial markets like the ECB has been doing for much of the past year.

ECB President Jean Claude Trichet nevertheless viewed the announcement as a partial success. "It goes in the right direction," he said.

The leaders also agreed to give Greece more time to repay its €110bn bailout, extending the maturity of its loans to 7-and-a -half years.

On top of that, the country, which was the first victim of the crisis, will have to pay less interest. Eurozone leaders decided to lower the rate by 1 percentage point, which should take it down to an average of about 4.2pc.

Ireland, the crisis' second victim, did not get the same leniency from the eurozone leaders. It will have to wait until another summit on March 24-25 for a decision on the interest rate for its €67.5bn bailout, currently at about 5.8pc.

The reason for the holdout was Ireland's refusal to make concessions on its rock-bottom corporate tax rate - long a sore point for France and Germany.

"Ireland was asked to make a gesture, but we didn't get satisfaction. So the renegotiation of loans that Greece has was not done for Ireland," French President Nicolas Sarkozy told journalists. "It's difficult to ask others to help finance a plan but not concern themselves with the tax side," Mr Sarkozy said.

The spat between Ireland's newly elected prime minister and French President Sarkozy - and less so Germany's Chancellor Merkel - was one of the reasons negotiations dragged on until the early morning hours. "We were not really satisfied with what Ireland said," said Mrs Merkel.

The timing of Saturday's agreement came as a surprise, since policymakers had insisted the big decisions would have to wait until the next summit at the end of the month.

However rising tension on financial markets, following painful downgrades of Greece and Spain's credit ratings earlier in the week, had added more urgency to Friday's meeting.

Portugal unveiled further spending cuts on Friday in a last-ditch attempt to convince investors its finances are sustainable.

The yield on Portuguese five-year debt hit a new high of 7.99pc amid mounting speculation that it will join Ireland and Greece in seeking a rescue package. Yields on Greek and Irish sovereign debt also rose, making it more expensive for them to borrow.

The euro has been falling against the dollar on growing doubts that leaders can bridge differences on how to solve the region's fiscal woes.

Portugal yesterday announced new spending cuts worth 0.8pc of GDP this year and structural reforms to push its deficit down faster. The measures include cuts in spending on social welfare and infrastructure.

Changes to labour market rules are also planned, including a reduction in redundancy payments. European Monetary Affairs Commissioner Olli Rehn welcomed the "clear and important" steps.

Chancellor Angela Merkel had said before last nightthat Germany would only increase its guarantees for the fund if other nations put in more capital. Instead, the focus of Friday's meeting was to make member states enshrine EU curbs on deficits and debt in national law – effectively making it illegal for any member to exceed fixed deficit and debt limits in the future. The EU's Stability and Growth Pact sets a government deficit limit of 3pc of GDP and debt of 60pc of GDP.

If Germany and France can get members to sign up to the competitiveness pact, which also includes moves to gradually raise retirement ages and work towards a common corporate tax base, it is thought they will agree to strengthen the bail-out fund to ensure stability in the Portuguese economy. Telegraph