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Stock markets have continued to rise following the eurozone’s comprehensive agreement designed to resolve the Greek debt crisis.

UK, French and German markets gained more than 0.5% in early trading, while Japan’s Nikkei closed up 1.2%. The euro also rose further against the dollar.

Eurozone leaders agreed a further 109bn euros ($ 155bn, £96.3bn) aid package.

Private lenders will contribute to the package, which will give Greece decades more to repay its debts.

The latest Greek bailout by the 17 eurozone governments and the International Monetary Fund is part of a comprehensive package to shore up the single currency unveiled on Thursday.

Eurozone leaders hailed the comprehensive agreement.

Dutch Prime Minister Mark Rutte said: “We have sent a clear signal to the markets by showing our determination to stem the crisis and turn the tide in Greece, thereby securing the future of the savings, pensions and jobs of our citizens all over Europe”.

Debt relief

The Institute of International Finance – a global trade body representing big banks and other major lenders – said the planned debt restructuring would target participation by 90% of Greece’s private sector lenders.

French President Nicolas Sarkozy said private lenders will contribute a total of 135bn euros of financing to Greece.

The plan is expected to provide some 50bn euros of debt relief to Greece.

Three of the four options offered to lenders to swap or relend existing debts would extend Greece’s repayment terms by 30 years, while the fourth would do so by 15 years.

They all offer a much lower interest rate than Greece’s current 15%-25% cost of borrowing in financial markets.

Two of the options would also involve “haircuts” – reducing the amount of debt Greece has to repay.

The terms of the deal imply a loss to Greece’s lenders equivalent to 21% of the market value of their debts, said the IIF.

First default

The restructuring is widely expected to be declared by credit rating agencies to be a default by Greece on its debts – something European leaders have been at pains to avert until now.

The ECB and France had been particularly opposed to a default, but it was ultimately insisted on by Germany.

German Chancellor Angela Merkel said: “I strongly welcome the voluntary contribution from the banks. I believe that this is the right signal coming at a difficult time”.

Mr Sarkozy played down the significance of the banks’ participation in the aid package.

“If the rating agencies are using the word you just used (default), it is not part of my vocabulary. Greece will pay its debt,” he told reporters.

The deal would make Greece the first ever EU country to default, and could have a number of serious repercussions:

• banks would be forced overnight to recognise in their financial accounts billions of euros in losses on Greek debts they own
• these losses could in turn leave banks short of capital – making it difficult for them to lend – and could leave the Greek banks insolvent
• Greek banks would also be unable to use their government’s debts as security to borrow cash from the ECB
• the ECB itself stands to make major losses on Greek debts it has bought or accepted as collateral from the Greek banks
• separately, the debt restructuring could also trigger payouts on billions of dollars of credit derivative contracts, used by financial markets to hedge against or speculate on a Greek default

The Greek bail-out package will be used to soften the blow to the Greek banks, with 20bn euros being used to recapitalise them, and 35bn euros to facilitate their continued borrowing from the ECB.

Irish interest rates

The biggest fear of European leaders is that imposing losses on Greece’s lenders could lead to contagion – a sharp increase in the rate at which markets are willing to lend to other eurozone borrowers, in particular Italy and Spain.

“We would like to make it clear that Greece requires an exceptional and unique solution,” the eurozone leaders said in a statement following their meeting.

Despite their fears, markets rallied as details of the new bail-out emerged, with the cost of borrowing for all of Europe’s heavily-indebted borrowers falling.

However, the borrowing costs of Portugal and the Republic of Ireland still remain at levels that suggest markets think they too are likely to default in the next five years.

Mr Sarkozy said on Thursday there will be no imposition of losses on private sector lenders to the Irish Republic or Portugal.

Thursday’s announcement should make life easier for both countries, with the repayment dates of their rescue loans being doubled to 15 years.

It also included a 2% reduction in the Irish Republic’s interest payments, something that the Republic’s Prime Minister, Enda Kenny said would save it a “substantial” 600-800m euros a year.

Investment projects

Among the other changes announced on Thursday were plans to ultimately turn the Eurozone’s bail-out fund into a European equivalent of the IMF.

The EFSF was granted new powers to buy up bonds – necessary for it to carry out the Greek debt restructuring – and to make credit available to countries such as Spain and Italy that are not at immediate risk of insolvency.

EU development funds and loans from the European Investment Bank would be used to finance Greek infrastructure and development projects.

The move responds to criticisms from some economists that the eurozone’s previous approach of insisting that Greece implement deeper and deeper budget cuts was killing the Greek economy, and therefore self-defeating.

European Commission President Jose Manuel Barroso also indicated plans to rein in the power of the credit rating agencies.

“We… endorsed the plan of reducing overreliance on external credit ratings,” he said, adding that policymakers would come forward in the autumn “with further proposals”.

All eyes are on the eurozone debt summit in Brussels

Global stock markets have risen on reports that eurozone leaders have reached a provisional agreement on measures to tackle the eurozone debt crisis.

The draft includes the possibility of a Greek bond swap and a debt restructuring, reports suggest. A bank tax has not been included, they say.

The Milan stock exchange rose by 4% while the Spanish market gained 3%. US shares also opened sharply higher.

European banking shares led the way.

In Germany, Commerzbank climbed almost 9% and Deutsche Bank rose 3.6%, while in France Societe Generale and Credit Agricole gained about 6%.

And in the UK, Barclays rose almost 10%, while Lloyds Banking Group and Royal Bank of Scotland were up more than 7%.

The austerity measures demanded by the IMf and EU have caused outrage in Athens

Greece’s enormous debts are sustainable but on a “knife’s edge,” according to the International Monetary Fund.

A 110bn-euro (£96bn) rescue package for Greece is being implemented but investors still fear a default.

Given the situation, Greece must stick to its reform programme, IMF Athens mission chief Poul Thomsen said.

His comments came as UK Deputy Prime Minister Nick Clegg said he was “incredibly worried” about the Greek debt crisis.

Greece under Prime Minister George Papandreou has passed several rounds of austerity measures, including tax increases, pay cuts, privatisations and public sector redundancies, to get aid from the IMF and the European Union.

Poul Thomsen, the IMF’s mission chief to Athens, said that Greece must now implement these reforms.

“Policies must be applied as planned, or the sustainability of the debt will be placed in doubt,” he told Greek newspaper Ethnos.

“The Greek debt is sustainable but it is, as we say, on a knife’s edge.”

US Secretary of State Hillary Clinton said on Sunday on a visit to Athens that “the US strongly support the Papandreou governement’s determination to make the necessary reforms to put Greece on a sound financial footing”.

Greece has more than 350bn euros of debt, and the IMF warned last week than it needs an additional 100bn in aid on top of last year’s bail-out to avoid a default.

The eurozone members will hold a special summit on 21 July to discuss the debt crisis and provide fresh aid for Greece.

‘Direct impact’

Mr Clegg told the BBC on Sunday that the crisis is “immensely serious”.

“This has a direct impact on British jobs and the livelihood of people in this country,” he said.

“I believe we should play an active role behind the scenes, because we are not a member of the euro, to help eurozone members make the reforms necessary to make a strong, prosperous eurozone in the future.”

The Irish Republic and Portugal have had bail-outs since Greece received its aid package, and markets last week suggested they were worried that Italy will be the next.

On Friday, the European Banking Authority (EBA) said eight out of 90 European banks have failed stress tests designed to ensure they can withstand another financial crisis.

None of the tests included what would happen to the banks if Greece defaulted on its debt.

Five Spanish banks failed, as well as one in Austria and two in Greece.

The news came just as Italy’s parliament approved a 70bn-euro austerity package.

According to the Bank for International Settlements, UK banks hold a relatively small $ 3.4bn (£2.1bn) worth of Greek sovereign debt, compared with banks in Germany, which hold $ 22.6bn,

There have been violent protests against the austerity measures in Greece

Standard & Poor’s has downgraded Greece’s credit rating yet again, partly due to what it sees as the rising risk of the country having to restructure its private sector debts.

The rating agency downgraded Greece to CCC from B and said it would consider any such restructuring as a default.

Last week, the Greek parliament passed tough austerity measures to secure further financial aid.

However, there is a growing sense that a debt restructuring is inevitable.

German and French banks have already agreed in principle to roll over loans to Greece in order to give the country more time to repay its debts.

This could involve effectively reinvesting the proceeds of maturing Greek debt into newly-issued bonds.

Standard & Poor’s said that, depending on the circumstances, it viewed “certain types of debt exchanges and similar restructurings as equivalent to a payment default”.

The options laid out so far for restructuring Greek debt would constitute such a default, it said.

Fresh bail-out

Over the weekend, eurozone finance ministers approved the latest tranche of emergency help for the Greek economy.

They will release 12bn euros (£10.4bn, $ 17.4bn) in the next two weeks to help Greece meet spending commitments and avoid defaulting on its huge debts.

Last week, the Greek parliament passed tough austerity measures demanded by the European Union (EU) and International Monetary Fund (IMF).

MPs backed the measures despite angry protests on the streets of Athens.

Last May, the EU and IMF provided 110bn euros in emergency loans to Greece, and agreed last month to provide another 120bn euros in loans to try and help the country though its debt crisis.