BRUSSELS — European chiefs are putting the International Monetary Fund on standby to aid debt-stricken Greece, seeking to snuff out a threat to the stability of the euro.

Leaders of the 16-nation euro region endorsed a Franco-German proposal for a mix of IMF and bilateral loans at market interest rates, while voicing confidence that Greece won’t need outside help to cut Europe’s biggest budget deficit.

“We had to answer the question: How can people place long-term trust in the euro as a stable currency and how can a currency union combine solidarity and stability?” German Chancellor Angela Merkel said after a European Union summit in Brussels Friday. “In this context, we really broke new ground.”

The summit sought to bury concerns that European divisions over aiding Greece would escalate the debt crisis and further undermine the currency after it sank to a 10-month low against the dollar.

“The Brussels agreement wipes out the risk of default, the refinancing risk and raises the credibility of the government’s austerity plan,” Petros Christodoulou, head of the Athens-based Greek debt agency, said Friday via e-mail.

The extra yield that investors demand to buy 10-year Greek bonds over comparable German securities fell 9 basis points to 304 basis points. The spread remains above the 273 points on Feb. 11 when the EU vowed “determined and coordinated action” to stanch the crisis.

“The Greek fiscal crisis may be over for now, but sovereign stress is likely to remain a huge issue in the euro area for years to come,” David Mackie, chief European economist at JPMorgan Chase in London, wrote in a note Friday. “The other euro-area countries suffering some sovereign stress at the moment are unlikely to view the Greek mechanism as any kind of attractive panacea.”

Under the accord brokered by Merkel and French President Nicolas Sarkozy, each euro-region nation would provide nonsubsidized loans to Greece based on its stake in the European Central Bank, a statement said.

Europe would grant more than half the loans and the Washington-based IMF the rest.

The plan would be triggered only if Greece runs out of fundraising options.

“The objective of this mechanism will not be to provide financing at average euro-area interest rates, but to set incentives to return to market financing as soon as possible,” the EU statement said.

The size of the loans and interest rates were left unclear, and the EU didn’t spell out what would force it to step in.

Asked what would trigger a European rescue mission, EU President Herman Van Rompuy said: “All this, we’ll work it out later.”

After objecting to a possible IMF intrusion on the $12 trillion euro-region economy, the European Central Bank endorsed the package.

The Greek government is counting on wage cuts and tax increases to shave the deficit to 8.7 percent of gross domestic product this year from 12.7 percent in 2009, the highest in the euro’s 11-year history.


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