The eurozone is ready to start formal talks with Athens over an €86bn (£60bn) bailout, paving the way for a month of wrangling over the bitterly disputed question of easing Greece’s debt burden.
Greece is also getting a €7bn emergency bridging loan from an EU-wide rescue fund, ensuring it will not crash out of the eurozone on Monday when a critical debt repayment falls due.
The emergency €7bn loan was approved with the unanimous consent of 27 EU countries, after the UK and other non-eurozone countries were offered safeguards aimed at protecting their taxpayers from a Greek default.
The desperately needed bridge finance will give Greece breathing space as it embarks on the tortuous process of agreeing a three-year bailout that could be worth up to €86bn.
Around €50bn is likely to come from the eurozone’s permanent bailout fund, the European Stability Mechanism, which on Friday gave its approval for talks to commence.
The formal launch of talks on a three-year bailout comes after the Bundestag and other eurozone parliaments, including those in Austria, France and Finland, voted in favour of opening negotiations with Greece.
The German chancellor, Angela Merkel, said any alternative to the bailout plan would be “predictable chaos” and criticised the idea of a temporary Greek exit from the euro – as put forward by her finance minister, Wolfgang Schäuble – as “unworkable”.
The talks will inevitably reopen the long-running argument over whether the Greek economy can recover while weighed down with debts totalling €320bn. The head of the European Central Bank, Mario Draghi, has said it is “uncontroversial” that debt relief is necessary, while the International Monetary Fund is pressing eurozone governments to allow Greece a 30-year grace period before it has to start paying.
Christine Lagarde, the head of the IMF, said the bailout plan would “categorically” fail without debt relief. And Valdis Dombrovskis, the European commissioner in charge of the euro, said debt relief would be part of the negotiations on a permanent bailout because it was “something the IMF insists on”.
But Germany, Greece’s largest creditor, has so far resisted large-scale debt relief and is implacably opposed to any step that could lead to reducing Greece’s debts. Schäuble argues that any reduction in Greece’s debts – known as a “haircut” – would be illegal under EU law.
The German finance ministry has said that giving Greece more time to pay its debts is a possibility but maintains that Greece’s current level of borrowing would be bearable if the country reformed its economy to spur economic growth.
The creditors have effectively set themselves a deadline of 20 August to resolve this argument. By that date Greece must repay €3.2bn to the ECB, but all emergency bridging finance will be exhausted by the end of July.
The €7bn bridging loan paves the way for an elaborate exercise in international shuffling of cash from one creditor to another.
Greece will use part of the €7bn from the EU to repay €4.2bn to the European Central Bank on Monday. Failure to make this payment could have forced Greece out of the eurozone. It will use another tranche of the loan to repay €2bn to the IMF to clear arrears, freeing the fund to lend Greece more money.
The remainder will be spent by the Greek government on clearing arrears to its own central bank. With this move it will no longer be in debt to the “Eurosystem” of central banks, another pre-condition of getting a bigger bailout.
The €7bn will come from the European Financial Stabilisation Mechanism, previously used to bail out Ireland and Portugal, and now reactivated despite initial objections from non-eurozone countries.
The commission argues it has given “belt and braces” guarantees to non-eurozone countries, including the UK and the Czech Republic, that their taxpayers would not lose out.
If Greece did default, non-eurozone governments would not be on the hook for the money because their contributions are ringfenced. The cash would instead come from profits on Greek bonds held by the European Central Bank, or could also be clawed back from Greece’s share of the EU budget.
The chancellor, George Osborne, has said there is an impregnable ringfencearound the UK’s £850m contribution.
If talks on a permanent bailout drag on longer than expected and Greece needs another bridging loan, it would be harder to use the EFSM again. The guarantees for non-eurozone countries are to be made legally binding, meaning it would be more time consuming to get money from this fund at short notice.
EU officials refused to be drawn on a plan B if talks on a permanent bailoutrequire more time than anticipated and Greece again needs emergency cash. The Greek government has “changed its attitude” which has boosted hopes of securing an agreement within a couple of weeks, Dombrovskis said.