After overnight negotiations in Brussels, European Union leaders agreed on a deal forcing banks to accept 50 percent losses on Greek debt. They also agreed to shore up European banks along with the European Union's bailout fund.
At a news conference early Thursday, EU President Herman Von Rompuy hailed the deal and spelled out some of its details.
"We fostered confidence in the European banking sector. We approved a coordinated scheme to re-capitalize banks across Europe," he said. "The ratio of the highest quality capital will be increased to nine percent. This will enable banks to withstand shocks important in the current exceptional circumstances."
French President Nicolas Sarkozy said the agreement offers a credible and ambitious response to the Greek debt crisis, which has spread to other countries in the 17-member eurozone.
Sarkozy says European leaders were determined to avoid the drama of a Greek default that might have the same disastrous consequences as the 2008 Lehman Brothers collapse - which sent shock waves around the world.
Under the plan, banks must raise new capital to be able to handle possible sovereign debt defaults - and accept much bigger losses on such defaults than they bargained for.
The deal comes amid strong criticism that EU leaders were moving too slowly and timidly to deal a crisis that now threatens to spread to larger European economies like Italy and Spain.
France's Sarkozy and Chancellor Angela Merkel of Germany - representing Europe's two largest economies - had vowed to come up with a comprehensive solution before next week's meeting of the Group of 20 major economies in the French resort town, Cannes.