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Next aid tranche to be approved in July but new bailout delayed

EU economics chief Olli Rehn has said he is "confident" that Greece will receive its next aid payment in early July, but has put off a deal on a further bailout until later in the month.

In a statement yesterday, he said eurozone finance ministers would sign off on a €12bn aid portion -- the fifth under last year's €110bn bailout from the EU and IMF -- at an emergency meeting this Sunday in Luxembourg.

"The funding of the Greek sovereign debt can now be ensured until September," Mr Rehn said.

Greece needs the money to pay off a tranche of debt maturing in mid-July, but the payout had been thrown into doubt following IMF threats to withhold its €3bn share if Greece couldn't prove it could fund itself over the coming year.

A spokeswoman for the IMF said yesterday that it would continue to support Greece "subject to adoption of the economic policy reforms agreed with the Greek authorities".

Embattled Greek Premier George Papandreou is struggling to win opposition and backbench support for a four-year €28bn austerity plan and a €50bn round of privatisations.

Parliamentary and cross-party approval of the plan is needed to release the July aid package and to secure EU backing for a second Greek rescue.

A new bailout deal is being kicked further down the road, but could be forged by the time finance ministers meet again in Brussels on July 11, Mr Rehn said.

Ministers failed to hammer out an accord during talks earlier this week after Germany clashed with the European Central Bank and France over whether to force bondholders to share in the costs of a new rescue. Mr Rehn warned eurozone finance ministers to get their act together before the deadline.

"The next days will be critical for the financial stability and economic recovery in Greece and Europe," he said. "I call on all EU decision makers, and more particularly the finance ministers of the euro area, next Sunday to overcome the remaining differences and come to a responsible agreement at this critical juncture."

German Chancellor Angela Merkel and French President Nicolas Sarkozy are meeting today ahead of an EU summit next week that could set the tone for how investors are treated under the rescue deal.

France backs the ECB's idea to ask investors to roll over their maturing Greek debt -- similar to the "Vienna Initiative" worked out for eastern European countries in 2009 -- while German investors swap their short-term holdings for seven-year bonds, saving Greece tens of billions in upcoming repayments.


Ratings agency Standard & Poor's, which earlier this week dropped Greece's credit rating to junk, estimates that Athens owes €95bn to creditors for sovereign debt maturing in the next two years.

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The ECB fears that any arm-twisting would lead ratings agencies to declare Greece in default and play havoc with the single currency.

Economist Daniel Gros of the Centre for European Policy Studies says an "orderly" default via a debt exchange would allow bondholders to recover around 60pc of their investments and cause minimal upheaval for Ireland and Portugal.

According to the Greek government's latest estimates, it ran up a €24bn deficit last year, which it must reduce to €17bn this year, while its debt mountain is now around €350bn -- 50pc more than the economy generates in a year.

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