Eurozone vows to battle debt contagion

After more than eight hours of talks held as the euro-crisis rattled markets, endangering the single currency area, ministers from the 17-nation eurozone agreed a range of measures to end weeks of widening differences that have fed financial uncertainty.

The ministers "reaffirmed their absolute commitement to safeguard financial stability in the euro area," in a statement that pledged measures "to improve the euro area's systemic capacity to resist contagion risk."

Among them was a move to strengthen the European Financial Stability Fund (EFSF) set up in the aftermath of last year's Greece crisis, which has a current lending capacity of 440 billion euros.

Useful for smaller economies, the fund would be hard put to fly to the rescue of Italy, Spain, the eurozone's third and fourth largest economies. The combined economies of crisis-hit Greece, Portugal and Ireland represent only half the size of Italy's.

Other measures include lengthening maturities of loans and lowering interest rates, thus giving countries in difficulty more time to pay back under lower interest, "including through a collateral arrangement where appropriate."

Better loan terms will be vital for Greece, facing a second rescue in September tipped to be almost as big as a 110-billion-euro ($150-billion) bailout in May 2010.

Turning to Greece, the ministers said in a statement that experts were working "steps to reduce the cost of debt-servicing" as well as ways "to improve the sustainability of Greek public debt", raising a possible buyback of loans by Athens to reduce its overall mountain of debt.

The pledge came as Greek Prime Minister George Papandreou warned fellow EU leaders to end division over the bloc's sovereign debt crisis with a clear message to sceptical markets.

"The Eurogroup must send a resonant message that there is a strong willingness to support Greece's ambitious programme of change," he said.

Eurogroup chairman Jean-Claude Juncker welcomed an agreeement by banks and other private sector to relieve the taxpayer's share of the burden by taking part in a Greek rescue.

The involvement of the private sector in a new bailout is at the root of rifts within Europe, with the likes of Germany, the Netherlands and Finland instsing on burden-sharing, whatever the cost.

The European Central Bank on the other opposes forcing banks into a deal that could be interpreted as a default of Greece and reiterated at the talks "that a credit event or selective default should be avoided."

Whether the measures, many still to be implemented, will reassure nervous markets remains to be seen.

"We are looking at something which is more systemic" than Greece, said Spanish minister Elena Salgado. "It concerns the stability of the eurozone in general."

As the ministers huddled, the euro slumped to its lowest level in six weeks, stock markets closed with heavy falls, including an almost four per cent plunge in Milan, and borrowing costs rose to 12-year euro-era record highs in Spain and Italy.

After heavily indebted Italy -- with a 1.9 billion euro debt -- came under attack last week, German Chancellor Angela Merkel stepped in to urge the Italian parliament to pass an austerity budget to avoid it being dragged into a debt crisis.

"The single currency has been absolutely battered today as European leaders struggle to stem the loss of confidence that they will be able to come up with a solution to the current sovereign debt crisis," said analyst Michael Hewson at CMC Markets in London.

"The news that EU leaders could be considering some form of default scenario for Greece has sent bond yields in Spanish and Italian 10-year paper (bonds) through the roof," he added.