After an unprecedented marathon of talks, involving two EU and two eurozone summits in just four days, Europe's leaders in the small hours Thursday agreed a new rescue of Greece, a trillion-euro (S$1.75 trillion) bailout fund, and cut a deal squeezing banks to share the burden of the two-year debt crisis.
"We have done what needed doing," said German Chancellor Angela Merkel.
News of the deal sent markets surging, with stocks in Paris and Milan up five per cent in mid-afternoon trade and the euro hitting a seven-week high against the dollar.
"Decisions have been made in Europe, and even if we are short on detail Europe's leaders are talking the right game and the markets seem to like it," said Kathleen Brooks, an analyst at traders Forex.com.
With the deal reached, IMF chief Christine Lagarde welcomed "substantial progress", but European Central Bank chief Jean-Claude Trichet warned that "all of this now requires a lot of work and a lot of quick work."
Analysts likewise welcomed the deal by European Union leaders, repeatedly accused of doing too little too late in the face of a festering two-year crisis, that after claiming Greece, Ireland and Portugal threatens Europe's third and fourth economies, Italy and Spain.
EU institions and governments "now seem more determined to get ahead of the crisis curve," said Janis Emmanouilidis of the European Policy Centre. "But it is by no means clear whether the final package will be able to boost confidence and provide orientation in the weeks and months to come."
Russia said the deal was grounds for "cautious optimism" to hold off dangers on the global front while China pledged faith in the eurozone and confirmed that President Hu Jintao would speak to French counterpart Nicolas Sarkozy later Thursday.
And Beijing, like Moscow, reiterated it would likely take a stake in the European rescue fund through the IMF, a sign that emerging economies plan to to play a larger role in the world economy.
As talks dragged on for almost 10 hours overnight in Brussels, the last and perhaps toughest chapter in the four-point plan was a deal between eurozone leaders and the Institute of International Finance banking lobby to force private investors to take a 50 per cent loss on Greece's debt.
In backroom drama, Sarkozy and Merkel broke off from the summit to save the day and cut a deal with the head of the banking lobby, Charles Dallara.
"We said it was our last word, our last offer," said Merkel of Europe's threats to allow Greece to default failing an agreement with the banks.
"Not only the future of Greece but the future of Europe was at stake," said Deutsche Bank chief Josef Ackermann after negotiating the write-down in his role as chairman of the IFF.
The deal aims to slice a whopping 100 billion euros off the 350-billion-euro debt pile hampering Greece, which also approved an accord for a 100-billion-euro loan over the next three years.
But financial analysts said they were waiting to see if all banks would sign on. "We still have no confirmation of the extent of the voluntary takie-up said Azad Zangana, of Schroders Quickview.
Prime Minister George Papandreou, hailed "a new era, a new chapter" for Greece, which triggered a crisis threatening to trigger global recession.
To address that danger, eurozone leaders agreed to boost their debt rescue fund to one trillion euros.
The firepower of the European Financial Stability Facility (EFSF) is to be leveraged up between four- and five-fold using clever financial footwork, to avoid increasing commitments from member states as taxpayers in countries such as Germany complain of pouring money into a bottomless hole.
The EFSF will provide risk insurance on new bonds issued by fragile governments in a bid to reassure investors.
A second fund, linked to the EFSF, will be created to attract private and public investors, including the likes of China and Russia. The investment vehicle might be linked to the International Monetary Fund.
Proposals for international help came as global powers pressed European leaders to come up with a lasting solution to the debt crisis before a G20 summit in France on November 3 and 4.
With fears growing that the debt drama will turn into a banking system meltdown, European leaders also struck a deal to force banks to recapitalise at a summit of the 27-nation EU that preceded the eurozone talks.
The European Banking Authority said banks would need 106 billion euros to fulfill the requirements.
Across Europe Thursday, major lenders, fearing government meddling and even nationalisations, said they could readily raise the capital without state help. With fears of contagion hitting Italy, Prime Minister Silvio Berlusconi came to the summit with a detailed list of pledges to cut his country's 1.9-trillion-euro debt.
"Whilst we expect markets to be jubilant as we enter the new year, questions remain as to the longer term solvency of some peripheral euro-zone countries," said Mike Turner of Global Strategy and Asset Allocation.
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