Euro debt relief, but dangers lurk

The ambitious steps taken by eurozone leaders pulled the euro from the brink of disaster, but dangers lurk before they can declare victory against the debt crisis.

The sweeping measures bring the 17-nation eurozone closer to the type of federal fiscal union that markets have demanded but that some nations, notably Germany, have resisted, analysts say.

Markets gave an initial thumbs up to the battleplan agreed at a summit Thursday: a new massive bailout for Greece, improved loan terms for bailed out nations and an overhaul of a crisis fund to react faster to crises.

"We are correcting the mistakes made since this crisis started: undersized Greek aid, exorbitant conditions and narrowness of the EFSF (crisis fund)," said Bruno Cavalier, chief economist at French brokerage firm Oddo Securities.

"However, there are significant risks," Cavalier warned.

Athens is far from fixing its public finances, contagion still threatens Italy and Spain, and key measures approved at the summit have to be voted by parliaments that may be reluctant to back them.

Greece -- the root of a crisis that dragged down Portugal and Ireland -- has yet to prove its solvency, one year after a 110-billion-euro bailout failed to put it back on its feet.

The new Greek rescue -- 109 billion euros in eurozone-IMF aid and 50 billion more in private sector help -- will put a small dent on the country's debt. The plan will only cut 26 billion euros from a 350-billion-euro debt load amounting to 160 percent of gross national product.

Eurozone leaders hope the Greek debt default that will ensue from the deal will be limited and last just a few days.

The pressure is also on the Socialist government of Prime Minister George Papandreou to press ahead with deeply unpopular austerity measures that have sparked riots.

"If Greece will miss the targets we can expect tensions in the euro area member countries, especially in the core area," said ING bank analyst Alessandro Giansanti.

Eurozone leaders were forced to act after days of market turmoil put pressure on Italy and Spain, the bloc's third and fourth biggest economies, fuelling fears that the crisis would spread beyond Europe's borders.

To prevent further contagion, the summit decided to expand the scope of the European Financial Stability Facility (EFSF), allowing it to relieve debt-stricken nations by buying their sovereign bonds at lower prices on secondary markets and providing bailouts for their banks.

French President Nicolas Sarkozy hailed the move as the birth of a European version of the International Monetary Fund.

The agreement was struck after Germany softened its stance on expanding the powers of the EFSF. In exchange, France and the European Central Bank dropped their objections to bringing the private sector into the Greek bailout.

But the deal has to be approved by national parliaments, some of which may be reluctant to ask their taxpayers to shell out more money for Greece and other spendthrift governments when they are undergoing their own austerity.

"In some countries, notably Germany, Finland and the Netherlands, we would expect some noisy opposition from members of parliament," said a research note by US financial firm Morgan Stanley.

Financial analysts were disappointed that the lending capacity of the EFSF, currently topped at 440 billion euros, was not raised to provide a bigger umbrella in case bigger economies need bailouts.

"This summit does not put a definitive end to the problem with public finances in Europe, nor does it put Greece back on the road to solvency," Oddo's Cavalier said.

"But it delivers the maximum that we could reasonably expect."

Follow Emirates 24|7 on Google News.