European leaders clinched Thursday a grand deal to pull the eurozone from the brink, convincing banks to take big losses on Greek debt while massively boosting a rescue fund to one trillion euros.
Banks accepted a 50-percent writedown on their Greek bonds to reduce the country's debt mountain by 100 billion euros after hours of tough negotiations at a summit that ran from Wednesday evening to early Thursday morning.
French President Nicolas Sarkozy said after almost 10 hours of talks that the decisions were "a major step forward to put in place powerful firewalls to prevent the crisis from spilling over to other countries of the eurozone."
Leaders came to their second summit in days amid global and market demands for a "comprehensive package" and fears the crisis could trigger world recession.
Also agreed in a four-point package of measures was an agreement for banks to beef up their capital buffers to absorb losses on Greek bonds, as well as pledges to tighten economic governance and fiscal discipline.
"The situation was evolving into a systemic concern threatening the eurozone as a whole. This threat has to be contained," said EU president Herman Van Rompuy.
Negotiations with the banks appeared close to collapse at one point after Sarkozy and German Chancellor Angela Merkel broke off from the summit to hold direct talks with the head of the banking lobby, Charles Dallara of the Institute of International Finance.
The banks in past weeks had agreed to take a 21-percent "haircut" on Greek bond-holdings as part of a second bailout for Athens agreed at a July summit, but the economic situation since has deteriorated due to recession.
The lenders had raised their offer to 40 percent but governments insisted on a 50-percent "haircut" to slice a big chunk off Greece's 350-billion-euro debt.
Amid fears of a possible bank meltdown, European leaders also agreed to recapitalise banks.
"We made good progress on the bank recapitalisation, that wasn't watered down, it now has been agreed," said British Prime Minister David Cameron at the close of a quick summit of the European Union's 27 leaders that preceded long talks into the wee hours of the 17-nation eurozone.
The European Banking Authority said banks would need 106 billion euros to fulfill the requirements by June 2012.
After bailouts of Greece, Ireland and Portugal, eurozone leaders agreed to boost betweeen four- and fivefold the firepower of their 440-billion-euro rescue fund to protect bigger economies in danger, such as Italy and Spain.
The fund, the main weapon against the crisis, has already been used to rescue Portugal and Ireland, and would be tapped in a new Greek bailout. But it would be too small for Italy and Spain, the eurozone's third and fourth biggest economies.
Under the plan, the eurozone would use clever financial footwork to "leverage" up the European Financial Stability Facility (EFSF) to one trillion euros without increasing guarantees provided by governments.
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.
Van Rompuy said leaders welcomed the vows but called on Rome to "abide" by its commitments.
With the world on tenterhooks, emerging powers China and Russia waded in with offers to help Europe safeguard the global economy by offering to contribute to the rescue fund.
The development came as global powers, from the United States to Japan and China, 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.