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updated 5/3/2010 9:58:00 AM ET 2010-05-03T13:58:00

Finance ministers from the 16 countries that use the euro agreed Sunday to rescue Greece with €110 billion in loans over three years to keep it from defaulting on its debts.

The loan package with the International Monetary Fund is also aimed at keeping Greece's debt crisis from spreading to other financially weak countries such as Spain and Portugal — just as Europe is struggling out of a painful recession.

In return, Greece had to agree to an austerity program that will impose painful spending cuts and tax increases on its people for years to come.

The plan will still need approval by some countries' parliaments. But the head of the eurogroup, Luxembourg's Jean-Claude Juncker, said Greece will get the first funds by May 19, when Athens has €8.5 billion worth of a 10-year bond maturing.

Chancellor Angela Merkel's Cabinet approved aid legislation Monday, an official said, as Germany slowly realized that letting Greece go bankrupt would send the euro into a tailspin and hurt its own economy.

Fears that the money might be held up by objections in powerful eurozone member Germany — where the Greek bailout is not popular — sent shudders through bond and stock markets last week.

But European Union President Herman Van Rompuy called for a special summit of the euro countries on May 7 to "conclude the whole process" once national parliaments deal with the issue "in the next few days."

Berlin needs parliament to approve its part in the rescue but Finance Minister Wolfgang Schaeuble and Chancellor Angela Merkel said that could be wrapped up by Friday.

"It is not an easy decision but there is no alternative," Schaeuble said after the eurozone finance ministers approved the package in an emergency meeting in Brussels.

Greek debt crisisU.S. Treasury Secretary Timothy Geithner, who spoke with Greek Prime Minister George Papandreou by phone Sunday night, also welcomed what he called an "ambitious reform program" by Greece and the "substantial financial package agreed to by the IMF and European Commission."

Juncker said the eurozone would contribute €80 billion to the package, with €30 billion of that to be made available this year. The rest of the money would come from the Washington, DC-based IMF.

EU Monetary Affairs Commissioner Ollie Rehn said the loans from other eurozone countries to Greece would carry an interest rate of "around 5 percent."

Because the interest rate is higher than the one those countries face themselves, they could make money out of the rescue package. But the rate is significantly lower than Greece would face if it tried to borrow on the international market, where it has seen its borrowing costs spiral because of investor fears it would default.

Athens has said the plan will allow it breathing space to implement harsh new austerity measures it announced earlier Sunday to bring its economy into order.

"This mechanism is an enormous step forward for Europe and of course for Greece," Greek Finance Minister George Papaconstantinou said.

The new measures he announced earlier in Athens include cuts in civil servants' salaries and pensions, and tax increases that aim to cut the deficit to below 3 percent of gross domestic product, within EU limits, by 2014. The deficit currently stands at 13.6 percent.

Timeline of Greece's debt problems"We are called on today to make a basic choice. The choice is between collapse or salvation," Papaconstantinou said before flying to Brussels.

He said savings worth €30 billion through 2012 would be achieved through public service and pension pay cuts, higher taxes and streamlining government.

Annual holiday bonuses will be capped at €1,000 ($1,330) per year for civil servants and scrapped for those with gross monthly salaries over €3,000 ($3,995), he said. Pensioners' bonuses will also be capped at €800 and canceled for those paid more than €2,500 ($3,330).

Salary cuts will not extend to the private sector, as had been widely feared.

Greeks receive their annual pay in 14 salaries, receiving extra at Christmas, Easter and for their summer vacations.

The IMF and EU said the bailout and austerity program were tough and would help Greece out of its troubles, but warned it would take years.

"The steps being taken, while difficult, are necessary to restore confidence in the Greek economy and to secure a better future for the Greek people," said a joint statement by Rehn and IMF head Dominique Strauss-Kahn."We are confident that Greece will rise to the challenge and succeed."

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