By Luke Baker BRUSSELS, May 10 (Reuters) - After 11 hours of hard and at times heated negotiations, European Union finance ministers struck a $1 trillion deal in the early hours of Monday that may have fended off a global debt crisis. The deal, which creates a 500-billion-euro ($670.9 billion) loan package backed by up to 250 billion euros from the IMF, is designed to stop Greece's debt problems spreading to other euro zone states. As part of the plan, the European Central Bank has begun buying sovereign debt on the secondary market. It appears to be working -- the euro has strengthened, world stock markets are up, and yields on Greek, Spanish, Portuguese and other debt have fallen sharply. Oil prices have risen. The euro zone may have fended off its Lehman Brothers moment. Following is a description -- compiled from EU officials, diplomats and other sources -- of how the deal appears to have come together over the past eight days, since finance ministers from the 16 euro zone countries met in Brussels on Sunday May 2 to secure a 110-billion-euro financial aid package for Greece. MARKETS DRIVE EURO ZONE ACTION That Sunday, ministers hoped the Greek bailout announcement, after nearly five months of turmoil and growing civil unrest, would be enough to calm financial markets. Euro zone heads of state, whose approval was needed for the bailout, would meet in Brussels on Friday, May 7, to ink the deal, they said. But they were overly optimistic. Financial markets were sceptical that the Greek aid package would be sufficient to stave off further contagion and by the afternoon of May 3 it was clear that further rescue measures would be necessary. In the days ahead, extreme market fluctuations piled pressure on the euro zone leaders before their May 7 meeting. Some European commercial banks were reporting difficulties in raising funds in U.S. markets because of the fears that Europe's debt crisis would affect the entire banking sector. Leaders were therefore expected to come up with a "big figure" bail-out or similar sort of financial mechanism to show skittish investors that they held the initiative in the crisis. Their meeting was scheduled for 7 p.m., but French President Nicolas Sarkozy arrived about three hours early. In that time he held bilateral meetings with most of his euro zone counterparts, rallying them towards a deal, EU sources say. By the time German Chancellor Angela Merkel, whose backing is essential for any euro zone deal but who was the most reluctant to approve a bailout, arrived just before 6 p.m., Sarkozy was ready to present her with a "fait accompli". "When she was told, she looked like a boxer who had been punched in the chest," said one European source who followed the developments closely. The same day, U.S. President Barack Obama had spoken to Merkel, underlining how important it was for global financial market stability that the euro zone reach a deal, not only to help Greece but to stave off the threat of wider contagion. AGREEMENT OUTLINED OVER DINNER The 16 euro zone heads of state, European Commission President Jose Manuel Barroso, EU President Herman Van Rompuy and European Central Bank Governor Jean-Claude Trichet held talks for about four hours over dinner. Diplomats say they agreed they should announce an overwhelming package of support for the euro area, but they could not agree on whether it should be open-ended or a limit should be put on it. Germany wanted a 500 billion euro limit. There was also disagreement about the structure of the mechanism, about whether it should involve loans between euro zone member states or loan guarantees, and what role the European Commission's balance of payments fund, used to provide financial support to non-euro-zone member states, should play. The ECB was also adamant its independence should not be compromised by any plan that might involve it being called on to buy member states' debt on the open market. It did not want to employ what it saw as being the "nuclear option". In the end, Barroso announced they had agreed a "financial mechanism" to support the euro zone, but gave few details. Sarkozy described a "mega-package", and said steps should be taken to quell speculation in the financial markets, but again the details were few and far between. Barroso said EU finance ministers would together agree the details on Sunday. MINISTERS FACE UNEXPECTED OBSTACLES The meeting of the EU's finance ministers -- each with an adviser and their country's EU ambassador in tow -- was scheduled to begin at 3 p.m., with a news conference pencilled in for 6 p.m. The details would be worked out quickly. But it soon became clear that it was not just a case of signing the deal -- the details still needed pinning down too. There were also unexpected other obstacles to negotiate. Germany's finance minister, Wolfgang Schauble, was taken ill shortly after arriving in Brussels. Schauble, who was shot and nearly killed by a mentally ill man 20 years ago and uses a wheelchair, had reacted badly to some medication. As he was taken to hospital, Germany needed to fly in a replacement from Berlin, delaying the start of talks. Once negotiations began in earnest, they focused on the disagreement over loan guarantees or loans. Germany said it should be loans, with loan guarantees too fluid and unbinding. There was also a dispute over the ECB's role. Diplomatic sources say the meeting occasionally became heated. One finance minister was reported to have shouted so loudly in anger over the ECB's reticence to take part in the rescue plan that he lost the crown of a tooth. One person who was in the room for part of the time described tense scenes, with groups of ministers and their delegations huddled in corners and agitated. Senior finance ministers repeatedly left the room to take part in G7 and G20 conference calls to discuss the bail out. Asian finance ministers were said to be alarmed about the prospect for continued uncertainty and fallout, with their financial markets opening shortly after midnight in Europe. Obama and Merkel spoke again about the severity of the crisis. GETTING ECB ON BOARD It is not clear what finally brought the ECB on board. On Thursday, May 6, at an ECB governing council press conference in Lisbon, Trichet was asked if the bank would consider intervening in the market to buy government bonds. "I would say we did not discuss this option," he said. But three days later the bank had apparently decided otherwise. Diplomats say the ECB only wanted to make sure that its duty-bound independence was adamantly put down for the record, but it also made clear that it was willing, within reason, to join whatever financial mechanism the ministers agreed on as long as there was strict budget deficit conditionality. "From the beginning, there was a really strong consensus that a deal would be struck, it was just a matter of time," said one person involved in the talks. "Everybody realised that history was at their backs. They were going to reach a deal, but it just took time to take everything into consideration." In the end it took 11 hours. By just after 2 a.m. on Monday, word was emerging of the deal that had been struck. (Reporting by Luke Baker, Ilona Wissenbach, Julien Toyer, David Brunnstrom and Justyna Pawlak in Brussels; Paul Taylor in Paris and Krista Hughes in Basel; writing by Luke Baker; editing by Timothy Heritage/Janet McBride) ($1=.7453 Euro) Keywords: EUROZONE FUND/DECISION (Luke Baker, Brussels newsroom, +32 2 287 6830; firstname.lastname@example.org) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.
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