Demonstrators stand in front of the Greek Parliament in Athens on November 7, 2012 during a 48-hour general strike.
Demonstrators stand in front of the Greek Parliament in Athens on November 7, 2012 during a 48-hour general strike.

Story highlights

Greece's creditors have approved the release of a €34.3bn loan tranche during a meeting in Brussels on Thursday

The payment, set for next week, is being touted as a crucial step in restoring Greek liquidity and growth

By setting aside €16bn for Greece's four largest banks, officials are hoping to trigger a trickle of lending

Greece will receive another €14.8bn early next year given that certain milestones in its reform programme are met

Financial Times —  

A much-needed – and long-delayed – €34.3bn loan payment should flow to Athens within days after Greece’s creditors gave their approval at a meeting in Brussels on Thursday.

Both EU and Greek officials touted the payment as a means to restore liquidity to a credit-starved Greece and return its economy to growth after months of uncertain bargaining that prompted predictions the country might tumble from the eurozone.

“As we approach the end of this turbulent year, those Cassandras have been proved wrong,” said Olli Rehn, the economics commissioner, following a meeting of finance ministers from the 17 eurozone countries, where the payment was approved.

Antonis Samaras, the Greek prime minister, was more succinct, telling reporters: “Solidarity in our union is alive. Grexit is dead.”

The biggest slice of the aid tranche – €16bn – will go towards recapitalising the country’s four largest banks, raising businesspeople’s hopes that a trickle of lending may resume after the holidays. But Evangelos Mytilineos, chairman and chief executive of the eponymous Greek industrial group, said the political impact of the deal could be more important than its positive impact on the economy, with the fragile three-party coalition government under premier Mr Samaras now looking stronger.

“It means, possibly, more political stability… The delays [in disbursement of the aid] have caused the government deep embarrassment. Now they should get a breathing space,” Mr Mytilineos said.

Athens bankers also sounded relieved. “This will improve the climate… I think we’ll see more deposits coming back to the banks since the risk of a Grexit has retreated,” one banker said, referring to a bank “jog” last June that saw more than €10bn of deposits withdrawals, mostly going into and under mattresses.

The eurogroup meeting was sandwiched between two other high-level gatherings attacking various elements of the EU’s debt crisis, including a banking union and deeper economic and monetary integration in the bloc.

Athens can expect to receive its first payment of €34.3bn sometime next week. Of that sum, €16bn will go to recapitalise banks, €7bn will cover budget shortfalls and settle past-due bills, and €11.3bn will cover the cost of the government’s debt buyback.

Greece will receive another €14.8bn in the first quarter of 2013. About €7.2bn will be paid in January for bank recapitalisation. The remaining €7.6bn will be broken up into three monthly tranches, each of which will be contingent on the government meeting certain milestones in its reform programme.

“This has been, as you remember, a difficult process,” Mr Juncker said. “But now – with the strong resolve of the Greek government and the close watch of the troika – we are convinced that the programme is back on sound track. We are ready to take additional measures so that it stays that way, provided Greece is up to its commitments.”

He noted the unusual brevity of the meeting – roughly 90 minutes – compared with other eurogroup gatherings that have stretched long into the night as ministers struggled to find common ground.

Greece’s creditors may still have to reconvene to revise its loan package after a government-led bond buyback fell just short of targets to reduce the country’s debt load. The buyback was part of a larger plan agreed last month to trim the country’s debt to 126.6 per cent of gross domestic product by 2020. Any straying from that target could prompt the International Monetary Fund to declare Greece’s debt burden unsustainable and withdraw its support.

The buyback cost Athens slightly more than expected, meaning that it erased less debt than anticipated. The shortfall was about 1.5 per cent of GDP, according to EU officials.

Mr Juncker said one of several possibilities to close the gap was to lower the co-financing rate that Greece must pay in order to gain access to its allotment of EU development funds.

Mr Rehn said such a change could yield “close to €5bn” – or about 2.5 per cent of Greek GDP. “This will help reduce the debt burden by around 2.5 per cent, which is quite significant,” he said.

But the eurogroup meeting was less successful in dealing with another source of trouble: Cyprus. The parties have been negotiating over a bailout for months to repair a banking system that was intimately entwined with nearby Greece.

Jean-Claude Juncker, the Luxembourg prime minister and eurogroup president, suggested that such talks would drag at least into January. “I don’t think we should tie our hands to a strict timetable,” Mr Juncker said, adding: “The problem in Cyprus is serious and we are tackling it in a serious way.”

A Cyprus rescue, which once seemed relatively straightforward, has presented its own challenges. One concern for the EU and the IMF is that a loan – although small in absolute terms – would be so large relative to the economy that it would be unsustainable.

Cyprus’s banks are believed to require about €10bn, which is more than half the country’s annual output. A clearer picture should emerge in mid-January, when a review of the banking system is due to be completed. The government would also require billions more to cover its own financing needs.

The talks have also been shadowed by a growing political concern in Germany and other member states about the potential backlash if they are seen using taxpayer money to rescue banks filled with deposits from wealthy Russians and others drawn to Cyprus as an offshore financial centre.

In a statement, the eurogroup said it was “confident that agreement on the programme could soon be reached, and we call on the international institutions and Cyprus to finalise negotiations accordingly”.