A new bailout package for Greece worth 109bn euros ($145bn) was approved by EU leaders on Thursday at an emergency summit of the Eurozone’s 17 member countries in Brussels. For the first time, private lenders, including banks, are pledging support and will contribute 37bn euros to the package, which will allow Greece easier repayment terms of its massive sovereign debt. Private lenders will contribute a total of 135bn euros ($179bn) over 30 years to Greece. Prime Minister George Papandreou welcomed the deal: “We now have a programme and a package of decisions which create… a sustainable debt management for Greece….This in the end of course, will mean not only the funding of a programme but it will also mean the lightening of the burden on the Greek people.” The issue of commercial investors assisting Greece has been one of the most contentious subjects in the EU debate on the most effective mechanisms to manage Greece’s bail-out.

The European Central Bank (ECB) opposed the plan, with concerns that it could spark a Europe-wide banking crisis and jeopardise the solvency of the ECB itself. Germany though insisted on the private sector bearing some of the pain, or, in the jargon “taking a haircut”. The argument against involving non-government lenders was that any action that would allow Greece easier repayment terms would be viewed by credit rating agencies as confirmation that Greece was unable to sustain its borrowings – and therefore qualify as “partial default”. In such a scenario, this would limit the ability of institutions, including the ECB, to continue to lend Greece money, as its own rules mean it can only accept collateral from borrowers the agencies say, have not defaulted on loans. ECB chief, Jean-Claude Trichet, declined to “prejudge” whether the ‘haircut’ taken by commercial investors will amount to a default. The ratings agencies have yet to respond, but if they do deem Greece to have defaulted, it will make the country the first in Europe to have done so. The eurozone has committed to back up any new Greek bonds issued to the banks with guarantees, if the deal is seen as a “selective default” by rating agencies; part of a concerted effort to circumvent the agencies whose judgements on credit-worthiness dictate the cost of borrowing for countries and companies.

After the summit, European Commission President Jose Manuel Barroso said: “We… endorsed the plan of reducing over reliance on external credit ratings,” Mr Barroso and EU leaders were careful to avoid the impression that similar arrangements could be made for other debt-ridden EU countries. The Commission President stressed that this second wave of assistance to Greece was a one-off event: “We are crystal clear that PSI [private sector involvement] is for Greece and Greece alone. It is an exceptional situation that we exclude for others.” Angela Merkel echoed Mr Baroso’s statement: “Greece is a special case,” said the German Chancellor.