BRUSSELS -- After marathon negotiations lasting through the night, European Union leaders have agreed a plan to fight the crisis that has gripped the eurozone.
Although technical details need to be worked out in coming weeks, leaders agreed the main points.
Under the deal, banks should accept losses of 50 percent on the Greek bonds they hold, in an effort to reduce Athens' debt burden.
Europe's banks will be recapitalized by June 2012, in part so they can sustain these losses.
And the 440 billion-euro ($617 billion) rescue fund, the European Financial Stability Facility (EFSF), will have its firepower boosted to 1 trillion euros ($1.4 trillion), in a bid to prevent larger economies like Italy and Spain being sucked into the debt crisis.
European Commission President Jose Manuel Barroso declared himself satisfied after almost 10 hours of negotiations.
"The package we have agreed tonight, this comprehensive package, confirms that Europe will do whatever it takes to safeguard financial stability. I have said it before and will say it again: this is a marathon not a sprint," Barroso said.
French President Nicolas Sarkozy was equally triumphant in his assessment of the deal and hoped that world markets would respond kindly.
"I think that the result was greeted with great relief by the whole world that waited for a strong result by the eurozone. I think that we have that result," Sarkozy said.
Sarkozy did, however, have to compromise on the trickiest part of the deal: the size of the losses, referred to as "haircuts," that banks must accept on the Greek debt they hold.
France had together with Europe's large banks pushed hard to keep the haircut to a maximum of 40 percent, whereas Germany and the Netherlands demanded at least 60 percent.
But the loss is voluntary, which might prompt some banks to refuse to budge, as was the case after an EU summit in July when the EU Council proposed a voluntary 21 percent haircut.
The agreement on the writedown also paved the way for a deal to recapitalize Europe's banks. Ninety of Europe's largest banks will have to boost their capital buffers by close to 106 billion euros ($148 billion) in the coming nine months. The banks should primarily raise money from the markets before turning to bailouts from national governments, with the EU ready to step in as a final resort.
The details surrounding the new supercharged EFSF remain vague and it is expected that finance ministers might flesh out more concrete plans when they meet on November 8.
The fund is viewed as the most potent tool to stop the crisis from spreading from peripheral countries of the eurozone to the very core.
The EFSF has so far been able to raise cheap cash for bailouts because of the triple-A credit rating of France and Germany and have been used to bail out smaller eurozone countries, such as Greece, Ireland, and Portugal.
But it had been deemed too small to save a country like Italy or Spain, which both risk being sucked into the crisis.
The idea of simply committing more, direct money to the fund by the stronger eurozone members was ruled out long ago. German Chancellor Angela Merkel told German members of parliament on October 26 that Berlin would not add more than the 211 billion euros ($295 billion) already given to the fund.
Another large contribution of money to the fund would probably also force a downgrade of French debt, jeopardizing the entire EFSF rescue system.
Instead, the EU will use some elaborate financial engineering to make the fund stronger.
Two options that can be combined and applied simultaneously will be used. The first is to turn the fund into an insurance scheme in which the EFSF could guarantee a certain percentage, most likely 20 percent, of fresh debt issues.
The other would be to create one or several separate funds linked to the EFSF that would raise money from private investors such as Chinese sovereign-wealth funds.
EU President Herman Van Rompuy told journalists that the exact new figure of the fund remained unknown but that it could be raised substantially if the two options were used correctly.
"The leverage could be around 1 trillion [euros] under certain assumptions about market conditions, the set-up and investors responsiveness in view of economic policies," Van Rompuy said.
A White House statement said U.S. President Barack Obama welcomed the "important decisions" by the EU to address the eurozone crisis and urged the swift implementation of the deal.
Financial markets surged following the announcement of the deal, with the euro climbing to its highest level against the dollar (above $1.40) in nearly two months.
But not everyone is impressed, since key details in the deal have yet to be pinned down. Until they all become clear, it's impossible to say if the deal can be implemented.
"The results are actually remarkably vague and the only positive [is] that there has been agreement at all," says Daniel Gros, director of a Brussels-based think tank, the Center for European Policy Studies.
"More important than the summit has been the speech of Mario Draghi yesterday where the incoming president of the [European Central Bank] indicated that he would continue stabilizing markets and I think that is what markets are reacting to today and not so much the euro-area summit."
The summit was also marked by considerable pressure on Italian Prime Minister Silvio Berlusconi to deliver on domestic, structural reforms. Berlusconi has been widely criticized recently by his colleagues for driving his country toward economic meltdown and he responded by pledging to increase the retirement age from 65 to 67 by 2026 and balance the state budget in 2013.
Merkel also made it clear that Brussels and the other member states would enjoy close supervision of Rome's reform efforts in the future.
"The Italian authorities have indicated that they all the necessary information will be made available in due time and Italian Prime Minister Silvio Berlusconi made it absolutely clear that this will be the case," Merkel said.