March 26 (Bloomberg) -- European chiefs put the International Monetary Fund on standby to aid debt-stricken Greece, seeking to snuff out a threat to the stability of the
euro.

Leaders of the 16-nation euro region endorsed a Franco- German proposal for a mix of IMF and bilateral loans at market interest rates, while voicing confidence that Greece won’t need
outside help to cut Europe’s biggest budget deficit.

“We had to answer the question: How can people place long- term trust in the euro as a stable currency and how can a currency union combine solidarity and stability?” German
Chancellor Angela Merkel said after a European Union summit in
Brussels today. “In this context, we really broke new ground.”

The summit sought to bury concerns that European divisions over aiding Greece would escalate the debt crisis and further undermine the currency after it sank to a 10-month low against
the dollar.

The euro advanced 0.9 percent to $1.3393 at 4.50 p.m. in Brussels from $1.3270 late yesterday.

Greek bonds gained, pushing the two-year yield down 23 basis points today -- and 83 basis points on the week -- to 4.43 percent, the lowest since Jan. 21. Greece’s benchmark stock
index rose 4.1 percent, the biggest gain since Feb. 9.

Risk Wiped Out

“The Brussels agreement wipes out the risk of default, the refinancing risk and raises the credibility of the government’s austerity plan,” Petros Christodoulou, head of the Athens-based
Greek debt agency, said today in an e-mailed response to
questions. “This should tighten the spreads materially starting
from the short end.”

The extra yield that investors demand to buy 10-year Greek bonds over comparable German securities fell 9 basis points to 304 basis points. The spread remains above the 273 basis points
on Feb. 11 when the EU vowed “determined and coordinated
action” to stanch the crisis.

“The Greek fiscal crisis may be over for now, but sovereign stress is likely to remain a huge issue in the euro area for years to come,” David Mackie, chief European economist
at JPMorgan Chase & Co. in London, wrote in a note today. “The
other euro-area countries suffering some sovereign stress at the
moment are unlikely to view the Greek mechanism as any kind of
attractive panacea.”

Under the accord brokered by Merkel and French President Nicolas Sarkozy, each euro-region country would provide non- subsidized loans to Greece based on its stake in the European
Central Bank, a statement said.

EU-IMF Split

Europe would grant more than half the loans and the Washington-based IMF the rest. The plan would only be triggered if Greece runs out of fund-raising options.

“The objective of this mechanism will not be to provide financing at average euro-area interest rates, but to set incentives to return to market financing as soon as possible,”
the EU statement said.

The IMF is watching the developments in Europe “closely,” spokeswoman Simonetta Nardin said in an e-mailed statement. “The fund always stands ready to consider a request from a
member country for our financial assistance,” she said.

The size of the loans and interest rates were left unclear, and the EU didn’t spell out what would force it to step in.

“The definition of the emergency case is very fuzzy,” Juergen Michels, chief euro-area economist at Citigroup Inc. in London, said in a note to investors. “As all euro-area
countries will have to agree unanimously on the activation of
the facility, the activation of the fund is very uncertain.”

‘Later’

Asked what would trigger a European rescue mission, EU President Herman Van Rompuy told reporters: “All this, we’ll work it out later.”

After objecting to a possible IMF intrusion on the $12 trillion euro-region economy, the ECB endorsed the package, with President Jean-Claude Trichet saying that European governments
will remain in control of the process.

Trichet, who told France’s Public Senat television yesterday that surrendering control to the IMF would be “very, very bad,” held his own press conference after the agreement
was struck to tone down the remarks.

“I never said the IMF intervention would be this and that,” Trichet said. “I wanted to preserve the responsibility of the governments of the euro area. That is my compass. And I
think that is respected.”

Greek Plan

The Greek government is counting on wage cuts and tax increases to shave the deficit to 8.7 percent of gross domestic product this year from 12.7 percent in 2009, the highest in the
euro’s 11-year history.

Greece needs to sell about 10 billion euros ($13 billion) of bonds in coming weeks. About 8.2 billion euros of debt matures April 20 and 8.5 billion euros on May 19, with about 3.9
billion euros of bills maturing in April.

Goldman Sachs Group Inc. estimates that Greece may ultimately get aid from the IMF worth about 20 billion euros over 18 months, according to an e-mailed note yesterday. The
French newspaper Le Figaro reported the aid would total 22
billion euros, citing German officials.

The budget deficits of all 16 euro nations are forecast to exceed the EU’s limit of 3 percent of GDP this year after the worst recession since at least World War II. While the euro’s
German-designed “stability pact” sets financial penalties for
countries that go over the limits, no country has been
sanctioned since the currency debuted in 1999.

Merkel has left open the possibility of pushing wayward countries out of the euro and today called for a toughening of the fiscal rules, which Germany forced the EU to water down in
2005 after three years of deficit overruns.