European leaders reached an agreement on tackling the region's debt crisis in the early hours of Thursday, following days of negotiations and a market on tenterhooks. Initial reaction to the three-pronged agreement reached at the euro zone leaders' summit was positive, with markets surging globally in response.

Banks with Greek debt will take a voluntary 50 per cent cut in the face value of their bond. It will reduce Greek debt levels to 120 per cent of GDP from around 160 per cent of GDP by 2020. The agreement was reached following lengthy discussions with representatives from financial institutions that had hoped for a smaller haircut, and had earlier in the night said that no deal was in sight. Member states will contribute up to 30 billion euros.

The move was welcomed by the Greek Prime Minister, Mr George Papandreou, who described the debt as “viable”. “A new day has come for Greece and let's hope that this new day is not only for Greece but also for Europe; that the worst is behind us,” he told a press conference.

Secondly, around 70 European banks will be required to increase their capitalisation by another 106 billion euros by next June. “They'll be required to have 9 per cent of the highest quality capital.”

If raising funds privately proves impossible, the banks could turn to their national governments, or as a last resort to the European Financial Stability Facility. Prime Minister Papandreou said that it might be necessary to nationalise some of his country's banks.

Greek banks account for the largest share of recapitalisation plans, followed by Spain, Italy, France and Germany.

Thirdly, the 250 billion euros that remains of the 440-billion euro bailout fund, following the support given to Greece, Ireland and Portugal, will be leveraged up to five-fold to provide guarantees of around 1 trillion euros. “It creates an efficient firewall against contagion,” said Mr Herman Von Rompuy, President of the European Council.

IMF Chief, Ms Christine Lagard, described the move as “a comprehensive plan”, while German Chancellor, Ms Angela Merkel, said that Europe had shown the world that it was capable of coming to the right decision. Leaders welcomed Italy's pledge to intensify its reform programme to have a balanced budget in the next two years.

With the announcement of the deal — which even during the negotiations had at points seemed unlikely — observers queried how long the optimism would last, urging the leaders to provide concrete details of the plans. French President, Mr Nicholas Sarkozy, said that he would be looking for Chinese cooperation in the rescue package.