Euro leaders agree second Greece bailout and overhaul of rescue fund

"For the first time, the politics and the markets are coming together," said European Commission president Jose Manuel Barroso, with markets having to date doubted the fundamental commitment of leaders to saving the eurozone.

EU council president Herman Van Rompuy said the deal proved "we will not waver in defence of our common currency".

Under the agreement, Greece is to get a fresh bailout, but with a lower interest rate (around 3.5%) and with a minimum of 15 years to pay back the loans. "The total official financing will amount to an estimated 109 billion euro," says the final agreement.

Pushed by Germany, the private sector will also be involved but eurozone leaders stressed several times that private sector contribution will be "voluntary" and will not be part of any potential future bailouts for other countries.

There remains a question mark over whether rating agencies will view the deal as a default, having previously said they take a dim view of involving the private sector.

German chancellor Angela Merkel indicated it was a risk she is willing to take. "We all know rating agencies are going to take a close look at this. I can't prejudge their rating. But I think that for markets it's important to achieve sustainability and for that it's very important to have private sector involved."

'European monetary fund'

Eurozone leaders also attempted to put out potential future fires by agreeing an overhaul of the eurozone's €440bn bailout fund so that it can act pre-emptively.

Under the deal, which will have to be ratified by national parliaments, the fund will be entitled to help out countries with credit line before they get to the stage of needing long-term aid and recapitalise banks through loans to governments. This aid could also be supplied to countries not in a bailout programme, something that is not the case currently.

"We have agreed to create the beginnings of a European Monetary Fund," said French president Nicolas Sarkozy.

Merkel, who forced Paris to back down on a proposed bank levy in return for giving new powers to the rescue fund, said the move was "historic".

"What we are doing now is an example for deeper integration - handing over and transferring more competences to EU institutions. This is a historic day."

Barroso, who on the eve of the summit said the history would harshly judge the leaders if they failed to reach a deal, urged them to "defend and implement" it with "determination".

Greek prime minister George Papandreou said the deal will "mean (a) lightening of the burden on the Greek people" whom he referred to as "proud and industrious".

While European stocks rallied when draft conclusions were leaked earlier in the day, some commentators were already highly critical of the deal.

Sony Kapoor, managing director of policy group Re-Define Europe, said: "EU leaders have missed the boat, yet again."

"The leaders pay lip service to the need for growth and investment in Greece but this is no Marshall Plan. The debt overhang will hurt growth and investment even as EIB and other EU funds seek to stimulate it."

He also said the changes to the rescue fund were based on "excessive conditionality" with Merkel stressing several times that the enhanced fund will need unanimity from member states in order to act.