European leaders agreed on Thursday morning on a crucial plan to reduce Greece’s debts and provide it with more rescue loans so that the faltering country can eventually dig out from under its debt burden.

After a marathon summit, EU President Herman Van Rompuy said that the deal will reduce Greece’s debt to 120 percent of its GDP in 2020. Under current conditions, it would have grown to 180 percent.

That will require banks to take on 50 percent losses on their Greek bond holdings a hard-fought deal that negotiators will now have to sell to individual bondholders.

IMF rescue

Mr. Van Rompuy also said the euro-zone and International Monetary Fund which have both been propping the country up with loans since May of 2010 will give the country another 100 billion ($140 billion). That’s slightly less than amount agreed in July, presumably because the banks will now pick up more of the slack.

“These are exceptional measures for exceptional times. Europe must never find itself in this situation again,” European Commission President Jose Manuel Barroso said after the meetings.

The question of how to reduce Greece’s debt load had proven the sticking point in European leaders’ efforts to come up with a grand plan to solve its debt crisis.

But it was just one of three prongs necessary to restore confidence in Europe’s ability to pay its debts and prevent the 2-year-old crisis from pushing the continent and much of the developed world back into recession.

The first details of such a plan emerged hours earlier, when European Union leaders announced they would force the continent’s biggest banks to raise 106 billion ($148 billion) by June partially to ensure they could weather the expected losses on Greek debt.

Mr. Van Rompuy also announced that the euro-zone would boost the firepower of their bailout fund to about 1 trillion ($1.4 trillion) in order to protect larger economies like Italy and Spain from the market turmoil that has already pushed three countries to need bailouts.

Historic deal, says Sarkozy

European leaders are to present a “historic” deal to solve the eurozone’s debt crisis to international partners at next week’s Group of 20 summit in Cannes, France, French President Nicolas Sarkozy said early Thursday.

“We will highlight the historic character of these decisions,” Mr. Sarkozy said after EU and eurozone leaders persuaded banks to forfeit 50 per cent of their Greek debt holdings and agreed on bank recapitalizations and a beefed-up bailout fund.

Those steps should “calm the markets and allow Greece to return to a normal growth path,” Mr. Sarkozy said, explaining that the 50 per cent figure was dictated by the need to reduce Greece’s public debt to 120 per cent of its gross domestic product by 2020.

In return, governments would be asked to finance “the remaining 100 billion euros [139 billion dollars] of Greek debt at sustainable rates, and provide 30 billion euros in guarantees “to avoid a selective default,” Mr. Sarkozy said.

EU has learned crisis lessons: Merkel

Reacting to the develoment, German Chancellor Angela Merkel said early Thursday that the crisis resolution plan pulled together by European Union leaders overnight showed that they could “draw the right conclusions” from the financial woes plaguing the eurozone.

“I am very aware that the world was watching these debates today,” she told reporters at the end of a marathon session of EU and eurozone leaders’ meetings in Brussels.

She specifically pointed to an agreement reached with banks over cutting the value of their Greek holdings, noting that they are now “substantial” participants in the rescue of the debt-laden country.

More In: International | News