Greece Gets Aid Infusion as EU Counts on Tsipras for Reforms

  • ESM approves payment of 2 billion euros after milestones met
  • EU's Dombrovskis says bank decisions due within weeks

Greece unlocked more of its rescue funds as the euro area called on Prime Minister Alexis Tsipras to maintain his nation’s commitment to meeting its bailout requirements.

In the first aid payment since August, when Greece secured an 86 billion-euro ($92 billion) third rescue, fellow euro-area governments on Monday approved a 2 billion-euro disbursement from the European Stability Mechanism firewall fund. This allows Greece to turn its attention to recapitalizing its banks and releasing another 1 billion euros in rescue funds before the end of the year.

“We are working based on a scenario that the Greek government sticks with its commitments and that the program is on track,” EU Commission Vice President Valdis Dombrovskis said in an interview on Monday. “Greek authorities recognize that it’s important to ensure financial stability in Greece and we currently also see a clear commitment from the Greek government to stick with the program.”

Euro-area finance ministers said Greece committed to “finalize a second set of milestones by mid-December” and also to remove bottlenecks that have held up projects that could benefit from European Union financing. Eurogroup chief Jeroen Dijsselbloem said the first overall review of Greece’s bailout program will stretch into next year, given the bailout’s pace so far.

On Track

Dombrovskis said Greece was on track to finish recapitalizing its biggest banks “within the next few weeks,” so any needed aid funds can flow before the end of the year. Now that Greece has met an initial set of financial-sector requirements, it must assess the capital needs of each bank, request aid money, and pass review from the commission’s state-aid authorities.

Tsipras may face increasing pressure on his government as he presses ahead with the bailout program. Last week’s vote on bailout-required measures saw his parliamentary majority erode to three seats, after two lawmakers previously aligned with the government refused to back the bill.

“It seems that the country’s international lenders have cut the government some slack” after its parliamentary majority narrowed still further “by allowing the thornier issues of increased taxation on farmers and pension cuts to be determined at a later stage,” Paris Mantzavras and George Grigoriou, analysts at Athens-based Pantelakis Securities, wrote in a note to clients on Tuesday.

Greece’s next reform targets will include financial-sector governance issues and pension reforms. The euro area hasn’t spelled out exactly which milestones Greece must meet to earn the 1 billion euros.

Debt Relief

The overall review is a precursor for any talks on debt relief, which in turn must take place for the International Monetary Fund to resume financial support for Greece. Dombrovskis said technical work on debt relief has started, and he reiterated that Greece’s creditors will consider what steps to take once the program review wraps up.

Pensions are one of the issues the IMF will need to see progress on before it can rejoin the program, Dijsselbloem said. He said the IMF renewed its commitment to be part of Greece’s rescue program once its conditions are met.

ESM chief Klaus Regling said Greece will be able to make “visible strides towards a sound recovery” if it can follow through on bailout requirements. In approving Greece’s 2 billion-euro aid payment, the ESM did not set a timetable for releasing funds for bank recapitalization.

Regling said Greece will receive the 2 billion-euro payment on Tuesday and he predicted that requests for the bank recapitalization money would be made in the next two weeks, speaking at a press conference after the meeting.

Greek banks won’t require more than 6 billion euros in public funds, avoiding the need to impose haircuts on depositors, a Greek government official told reporters on Monday. This compares with a total amount of 25 billion euros that had been earmarked for bank aid, of which up to 10 billion euros is currently available.

The bank index of the Athens Stock Exchange fell 21 percent to a record low on Monday, as new stocks were sold to investors at lower prices than the shares of lenders currently trade. The market value of the state’s holdings in Greek bank shares has fell to just over 1 billion euros, according to data compiled by Bloomberg, from a 25 billion euros initial investment in 2013.

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