Europe hopes for a deal at last in €130bn Greek saga

European finance ministers appeared last night to be on the brink of a deal to grant Greece another multibillion-euro bailout and stave off the threat of a potentially disastrous default next month.

Evangelos Venizelos, the Greek Finance Minister, said he expected the meeting in Brussels to bring his country's "long period of uncertainty" to an end, while his French counterpart, François Baroin, said all the elements for the agreement were in place. The German Finance Minister, Wolfgang Schäuble, said he was "confident" that the summit would produce a positive outcome.

That upbeat message was echoed by Christine Lagarde, managing director of the International Monetary Fund, who praised Greece's recent "significant efforts" to get its public finances into shape. European stock markets climbed on the expectations of a deal, with shares in some large French and German banks rising.

After protracted talks this month, the coalition government in Athens agreed to impose €3.3bn (£2.75bn) of extra spending cuts and tax increases this year – a commitment demanded by its European government creditors as a condition for the release of €130bn in new bailout money. Greece is entering its fifth year of recession after its economy contracted by 6 per cent in 2011. It has imposed spending and tax cuts equal to 8 per cent of its GDP over the past two years. Protests against these austerity policies have boiled over in the past week. About 3,000 demonstrators gathered at Syntagma Square, Athens, yesterday and there were fresh confrontations with riot police.

There were signs that the extra bailout funds would be paid into a special account controlled by Greece's European partners, from which creditors will be paid directly. This is to ensure European governments can withhold money from Athens if it does not deliver on its reform commitments, without running the risk of default.

The Dutch Finance Minister, Jan Kees De Jager, was also pushing for the European Commission, the European Central Bank and the IMF to establish a permanent presence in Athens to oversee Greek budget decisions. Finance ministers were also expected to give their approval to a bond-swap deal with Greece's private-sector creditors, which would see Greek bondholders take an effective 70 per cent writedown.

The Greek government said at the weekend that it expected the bond swap to take place on 8 March and to be completed three days later. Some €23bn of the €130bn bailout is expected to go towards recapitalising Greek banks. There will also be about €30bn in "sweeteners" for Greece's bondholders to accept the swap deal. The European Central Bank indicated earlier this month that it might forgo the profits on its holdings of about €55bn in Greek bonds that it acquired in 2010 and 2011 and transfer the profits to Athens to help ease the debt burden.

But there have been growing doubts about whether the deal will be enough to put Greece on a sustainable fiscal path. A report last week showed that Greek debt will fall only to 129 per cent of GDP by 2020.

Q&A: What next for Greece?

Q What is the agreement?

A European finance ministers are moving towards approval of a new €130bn (£108bn) bailout package. Greece needs these rescue funds to redeem €14.4bn of bonds on 20 March. If the money had been withheld, Athens would have been forced to default, sending a potentially catastrophic shockwave through the European financial system. The agreement also clears the way for a deal between Greece and its private sector bondholders to announce an agreement that would see the Greek government's €355bn debt burden cut by €100bn.

Q Does this mean the end to the crisis is in sight?

A Not really. The deal still needs to be approved by the German parliament later this month. Many delegates in Berlin have indicated that they would prefer to see Greece default rather than swallow up any more European rescue funds. And even if that hurdle is cleared, no one can be sure whether the plan will work and put Athens's public finances on a sustainable footing. Another unknown is the response of the financial markets; panic could easily return.

Q What happens next?

A The fear is that, once the deal is concluded and the losses are booked by European banks, investors in the debt of other struggling European states will conclude that they are next in line for a haircut and start dumping their sovereign-bond holdings in a panic. This would send up the borrowing costs of eurozone states once again. This, in turn, would feed panic as investors recall that the various bailout funds established by European governments are simply not big enough to prop up a massive borrower such as Italy.

Q And Greece?

A Greece will hold elections in April. EU leaders have extracted pledges from the main Greek political parties to honour the austerity agreements they made over a week ago. But it remains to be seen how much those promises are worth. A bigger danger in the medium term is if Greece's economy does not return to growth within the timetable laid out. That would mean Greece returning to its European partners for more money. Or, it could lead to a default and Greece's exit from the eurozone.