By DAVID McHUGH and GABRIELE STEINHAUSER, Associated Press
BRUSSELS (AP) — The bailout has saved Europe, for now, but it's unlikely to save Greece.
The euro130 billion ($172 billion) rescue — agreed to Tuesday after an all-night summit of European ministers — prevented an uncontrolled bankrupcty and calmed investors worried that a Greek default would have started a chain reaction across Europe. But it left key problems unresolved.
Draconian budget cuts could keep Greece mired in recession after five straight years. The deal doesn't directly address the debt problems in other struggling countries in the 17-country zone that uses the euro. Spending cuts could reduce tax revenue and possibly worsen the government's finances.
"You can't shrink your way out of a recession," said Mark Weisbrot, co-director of the liberal Center for Economic and Policy Research in Washington. "What they are doing to Greece really makes no economic sense."
In Athens, Greeks reacted with a mixture of relief and fear of a dark future.
"I don't see it with any joy because again we're being burdened with loans, loans, loans, with no end in sight," architect Valia Rokou said in the Greek capital.
Finance Minister Evangelos Venizelos said the agreement managed to prevent imminent catastrophe: "we avoided the nightmare scenario," he said.
The agreement was the second massive bailout of Greece following a euro110 billion ($146 billion) rescue in 2010 that didn't return the country to solvency. It will give Greece euro130 billion in loans through 2014 from other eurozone governments and the International Monetary Fund. It was secured after Greece agreed to painful and humiliating measures, including thousands of layoffs of civil service workers and cuts to the minimum wage, imposed by countries suspicious of Greece's reform efforts after two years of what they called the country's broken promises.
The finance ministers wrangled until the early morning over the details of the rescue, squeezing last-minute concessions out of private holders of Greek debt who agreed to lose 53.5 percent of the face value of their investment to avoid even more severe losses if Greece fails to pay euro14.5 billion in debt due March 20.
The serious risks of the bailout's failure include the likelihood that Greece's economy remains in a deep recession instead of returning to growth in 2013 as the deal assumes. That would undermine chances of paying even the reduced debt load, estimated at a still-high 120 percent of annual economic output in 2020, down from 160 percent now.
Additionally, political outrage over the cutbacks could lead Greece politicians to balk at the tough conditions. That could push rescuer countries — led by Germany — to cut off further funding.
Elections in Greece are expected in April. The leaders of the two main parties have committed to the cuts and reform program, but anti-bailout parties have been gaining in the polls.
Greece's economy shrank 7 percent in the fourth quarter of last year and unemployment is 19 percent, a consequence of cuts in public wages and increased taxes inflicted during a downturn.
If that keeps up, even the rescuers acknowledge the reduction goal of 120 percent of GDP is long gone.
"The risks are clearly on the downside," said Diego Iscaro, an economist at IHS Global Insight. "By austerity alone, Greece will not solve the problems it has at the moment. We don't know when the economy will return to growth and how it will grow."
Greek politicians nevertheless greeted the package as a turning point for their battered country.
"It's no exaggeration to say that today is a historic day for the Greek economy," said Greek Premier Lucas Papademos.
The deal helped bring the Dow industrial average over 13,000 on Tuesday for the first time since May 2008, powered by optimism that economic recovery was on the way. It finished up 15.82 points at 12,965.69.
In Washington, White House spokesman Jay Carney said President Barack Obama called German Chancellor Angela Merkel to thank her for her leadership in helping secure the eurozone agreement. But Carney said European countries need to do more to stave off further crises, including strengthening financial firewalls to prevent one nation's troubles from spreading across the continent.
Including Greece's first bailout worth euro110 billion the new deal means every Greek man, woman and child will owe the eurozone and the IMF about euro22,000 ($29,000).