EU LEADERS have settled on a second Greek rescue and a sweeping overhaul of their bailout fund. The new pact will be of great benefit to Ireland, with potential annual savings of €800 million when the bailout is at its height.

Will it be enough though to blow away the threat of contagion?

The leaders have met five times this year in their long quest to assert control over the debt emergency. If their piecemeal approach so far has done little to hold back relentless waves of turmoil, the force of pressure on Spain and Italy has now led them to adopt something bigger and bolder.

After 10 hours of talks yesterday in rainy Brussels, there are two core elements to the new agreement.

First, the leaders have bridged divisions over the scale and scope of the effort to enlist private creditor participation in the new Greek aid plan. Second, an expansion of the rescue fund’s remit will help lessen some of the load from bailout recipients like Ireland.

Neither initiative will get Europe out of jail quickly. By acting in a more decisive manner, however, euro zone leaders have sent a clear signal that they take the threat to Spain and Italy seriously. They had no alternative.

The truth is that these two countries are too big to save together – and the implosion of one would threaten the other.

The crisis in Greece and all that followed has drawn EU leaders deeper into each others’ affairs than ever before, but this is a painstaking business with abundant political tension and no end of financial risk.

As talks continued until 9pm last night, rumour and speculation swirled for hours around the glum Justus Lipsius building into which the leaders and legions of officials were crammed.

For Ireland, looming reforms to the European Financial Stability Facility bailout fund herald the prospect of longer maturities on rescue loans and lower interest rates. That serves to ease the upfront burden of the bailout.

Taoiseach Enda Kenny went into the meeting knowing that his long disagreement with French president Nicolas Sarkozy over corporate tax was unresolved.

There was no telling how the mercurial Sarkozy might respond to any new entreaty from the Taoiseach, but the portents were positive from the off.

According to the summit communiqué, the leaders agreed that the EFSF would lend at about 3.5 per cent per annum to Ireland and Portugal. This would imply a cut of a more than two percentage points from the current Irish rate of roughly 6 per cent, considerably more than the one percentage point cut on the table since March.

This came in spite of warnings from sources close to the talks who said some countries were not inclined to yield any more than a one percentage point cut.

The communiqué notes “Ireland’s willingness to participate constructively in the discussions on the consolidated common tax base draft directive (CCTB) and in the structured discussions on tax policy issues in the framework of the EuroPlus pact framework”.

Although Kenny has long made clear his deep scepticism about the CCCTB plan, he could probably live with such a pledge to engage thoroughly in “discussion” on a policy he does not intend to execute.

The EFSF will also have powers to lend to the Government to enable it to buy back Irish sovereign bonds at market prices, thereby reducing the weight of the national debt.

Also in prospect are new credit lines from the fund which would be used by Dublin as a stop-gap line of support as it makes a return to private debt markets.

In essence, this would help Dublin borrow from the market even if private investor demand does not match the full amount of debt to be raised.

That remains a big risk, particularly after Moody’s credit rating agency imposed a “junk” rating on Irish debt. This is all the more important given that the Government faces a multi-billion-euro bond redemption in early-2013.

All told such reforms are designed to dim the rescue burden on aid recipients like Ireland, easing the State’s exit from the strict confines of a humiliating bailout. In turn, that is designed to avert the risk that Ireland might need a second rescue, which would be hugely difficult to agree and to execute.

The Greek example is a case in point. German chancellor Angela Merkel wanted a big private sector contribution to offset political resistance in Berlin to a second intervention.

This held out the prospect of a selective default being declared on some Greek debt, raising the considerable ire of European Central Bank chief Jean-Claude Trichet.

That Merkel and Sarkozy called Trichet to their pre-summit dinner meeting on Wednesday said much about the depth of the tension around this question.

The mode of private creditor participation may be by way of debt rollover (buying new bonds as existing bonds mature) or a debt swap (exchanging existing bonds for bonds with a longer maturity). The key problem, however, was that both would be likely to trigger a selective default rating.

As the talks continued, however, sources briefed on the proceedings said it appeared the ECB was preparing to change tack.

The key question, still unresolved as talks continued into the evening, was whether the ECB would be willing in principle to accept defaulted Greek bonds as collateral for the emergency loans it makes to Greek banks.

However, the Trichet said late yesterday that EU leaders would guarantee Greek bonds in money market operations should a bailout agreement today trigger a default. This would make it easier for the ECB to continue supporting Greek banks.

Fully 11 weeks have passed since the news leaked about a “secret” meeting on Greece in Luxembourg, sparking months of volatility. As the situation spiralled out of control in the last month, pressure grew for a new plan.

That we have been here several times before is not lost of anyone. There are few who would bet that the crisis will soon be brought to heel.