Virginia Mayo, Associated Press
BRUSSELS — After harrowing late-night negotiations, the leaders of the 17-country eurozone thrashed out a strategy on how to deal with the debt crisis that has crippled the currency union over the past year and already pushed two of its members into multibillion euro bailouts.
"The fundamental path was hacked open," German Chancellor Angela Merkel told journalists early Saturday morning.
Along the way, Merkel made some serious concessions, which might cost her when she faces her electorate at home.
Together with her eurozone counterparts, Merkel agreed to boost the region's bailout fund, the European Financial Stability Facility, so it can lend the full €440 billion that it initially promised.
Up to now, the EFSF was only able to lend about €250 billion because of several buffers required to get a good credit rating — fanning fears that it would not be big enough to save a large country like Spain.
The fund will also be allowed to buy the bonds of governments in financial difficulties on the open market, but only if the respective country is locked into a national bailout program based on strict conditions.
That step marks an important expansion in the fund's powers, since buying bonds can help stabilize their prices and a country's funding costs. However, it falls short of demands made by the EU's executive Commission as well as the European Central Bank, which wanted to see the fund take an even broader role, buying bonds to calm financial markets like the ECB has been doing for much of the past year.
ECB President Jean Claude Trichet nevertheless viewed the announcement as a partial success. "It goes in the right direction," he said.
The leaders also agreed to give Greece more time to repay its €110 billion bailout, extending the maturity of its loans to 7 1/2 years.
On top of that, the country, which was the first victim of the crisis, will have to pay less interest. Eurozone leaders decided to lower the rate by 1 percentage point, which should take it down to an average of about 4.2 percent.
Ireland, the crisis' second victim, did not get the same leniency from the heads of state and government. It will have to wait until another summit on March 24-25 for a decision on the interest rate for its €67.5 billion bailout, currently at about 5.8 percent.
The reason for the holdout was Ireland's refusal to make concessions on its rock-bottom corporate tax rate — long a sore point for France and Germany.
"Ireland was asked to make a gesture, but we didn't get satisfaction. So the renegotiation of loans that Greece has was not done for Ireland," French President Nicolas Sarkozy told journalists. "It's difficult to ask others to help finance a plan but not concern themselves with the tax side," Sarkozy said.
The spat between Ireland's newly elected prime minister and French President Sarkozy — and less so Germany's Merkel — was one of the reasons negotiations dragged on until the early morning hours. "We were not really satisfied with what Ireland said," said Merkel.
The timing of Saturday's agreement came as a surprise, since policymakers had insisted the big decisions would have to wait until the next summit at the end of the month. But rising tension on financial markets, following painful downgrades of Greece and Spain's credit ratings earlier in the week, had added more urgency to Friday's meeting.
At the same time, the eurozone's weakest members also made concessions that made it easier for fiscally stronger countries like Germany, Finland and the Netherlands to agree to more help. Earlier in the day, Portugal — which most analysts see as the next likely candidate for a bailout — announced further tax increases and spending cuts, which were lauded not only by Germany but also the ECB and the European Commission.
The entire eurozone also agreed to a so-called "pact for the euro," which will see governments coordinate their economies more closely to boost competitiveness — a German pet project.
In the pact, eurozone leaders commit themselves to hit annual benchmarks on economic competitiveness, boosting employment and making their budgets sustainable in the long term.
Sanctions are not foreseen in the pact, but officials stressed that the leaders would make concrete commitments to each other, which would be enforced not only by peer pressure but also by negative reaction on financial markets.
Greg Keller and Don Melvin contributed to this report.