A pledge made by the Euro countries in late March to assist Athens with a 54 billion debt pile due for payment this year failed to convince the markets, and as a result, investors have been demanding high interest rates to lend to the Greek government.
In an emergency video conference yesterday, the finance ministers of the 16 Euro zone nations agreed on a complex three-year financing formula that generates an interest rate of "around five percent".
This is less than commercial market rates – which have soared above seven per cent on Greek 10-year borrowing in recent weeks as the debt crisis dragged on.
Strong public opposition to any bailout for Greece in Germany, Europe's biggest economy and main paymaster, had fuelled market doubts about the availability of any rescue.
European Central Bank president Jean-Claude Trichet and German Chancellor Angela Merkel have insisted that Greece not get below-market interest rates amounting to an EU subsidy for its past bad behaviour.
"This is certainly no subsidy to Greece," Olli Rehn, the EU monetary affairs chief told a news conference.
The International Monetary Fund stands ready to chip in another 10 billion, Rehn added.
Greek Prime Minister George Papandreou said Greece has made no immediate request to activate the EU bail-out plan. Finance minister George Papaconstantinou said Greece aims to continue commercial borrowing, presumably counting on a drop in rates when markets open today.
"With today's decision, Europe sends a very clear message that no one, any longer, can play with our common currency, no one can play with our common fate," Pap-andreou said. "The question remains whether this mechanism will convince markets just like a gun on the table. If it does not convince them, it is a mechanism that it is there to be used."
European Commission President Jose Manuel Barroso said the pledge of cash for Greece showed the 16 Euro zone nations will defend Europe's single currency and help a partner in trouble.
"It shows that the euro area is serious in doing what is necessary to secure financial stability," Barroso said in a statement. "I am convinced it will help Greece to continue vigorously correct public finances imbalances and to deliver necessary structural reforms."
Greece has been spending beyond its means for years, leaving it with a 2009 budget deficit of 12.9 per cent of economic output. The revelation of its statistics fudging has hit the euro and gutted market confidence, fuelling higher borrowing costs. Athens plans to cut its deficit to 8.7 per cent this year and has launched a 4.8 billion austerity programme cutting public sector wages, freezing pensions and putting up taxes.