Eurozone finance ministers and Greece's creditors on Tuesday (24 May) renewed the tradition of late night discussions but in the end agreed to disburse a €10-billion tranche of aid and to relieve Greece of part of its debt.

The agreement will also keep on board the International Monetary Fund (IMF), which called for debt relief. But that decision will have to be confirmed later this year.

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"It is now recognised by all stakeholders that Greek debt is unsustainable," IMF representative Poul Thomsen said (Photo: Council of the EU)

"It is something that a month ago I couldn't have dreamt of that the ministers would have agreed to," the Eurogroup president Jeroen Dijsselbloem told journalists after the 11-hour meeting.

"The ministers have stretched their political capital to put this on the table," he said.

The first decision taken was to close the first review of the €86-billion bailout programme agreed last year.

That was made possible after Greece in recent weeks passed laws to reform its pensions and income tax system, increase VAT, create a privatisation fund, facilitate the selling of bad loans by banks and establish a fiscal brake mechanism in case the budget goes off-track.

Ministers decided that Greece would receive €10.3 billion, starting with a first tranche of €7.5 billion, probably in the second half of June, to cover debt servicing needs and clear some arrears.

'Important moment'

A second €2.8-billion tranche would be disbursed after the summer, when Greek authorities have taken measures regarding the privatisation fund, bank governance and arrears clearance.

"It is important moment for Greece after so much time," Greek finance minister Euclid Tsakalotos said after the meeting.

Although the conclusion of the review, seven months later than originally planned, is a major step in the bailout programme, it was overshadowed by difficult talks on debt relief.

The IMF had linked its further participation in the programme to an agreement on debt relief because it says that the Greek debt is not sustainable.

IMF's rules say that it cannot fund a bailout when a country's debt is not sustainable.

In discussions prior to Monday's meeting the fund called for an "upfront unconditional" debt relief for Greece.

The IMF proposal was opposed by Germany, which on the other hand said it would not accept that the bailout continues without the IMF.

Discussions at the Eurogroup were "difficult with the IMF," a EU source said.

Another source told EUobserver that talks were "like a match between the IMF and Germany with a lot of time-outs".

Sirtaki dancing

Ministers, the IMF representative Poul Thomsen and officials from Greece's European lenders - the European Commission, the European Central Bank and the European Stability Mechanism - worked on several draft statements detailing different solutions for debt relief.

The meeting was suspended several hours to go through the details, and a second time so that Thomsen could speak with the IMF's chief Christine Lagarde who was in Kazakhstan.

At one point, to relax the atmosphere, a French official made a demonstration of sirtakis, the traditional Greek dance, several sources said.

Just before 2 am, the Europeans and the IMF agreed on short and medium term measures to reduce the cost of debt repayment for Greece.

The plan, which still needs to be detailed, will imply that the ESM, the eurozone's emergency fund which owns part of the Greek debt, takes measures that would reduce interest rates for Greece, extend loans maturities and open the way for it to buy loans from the IMF.

In the long term, Dijsselbloem said, "a possible debt relief will be delivered at end of programme" in 2018, and its scope would be determined on the basis of new assessment of the sustainability of the Greek debt.

Debt compromise

The debt deal was described by participants as a compromise.

"The IMF welcomes that it is now recognised by all stakeholders that Greek debt is unsustainable and that Greece needs debt relief," the fund's Poul Thomsen told journalists.

Thomsen added that the IMF made a "major concession": "We had argued that this debt relief measures should be approved up front and we have agreed that they will be approved at the end of the programme".

On the other hand, EU institutions and ministers agreed to specify that Greece's primary surplus - the budget surplus before debt payments - should be 3.5 percent of GDP "as of 2018", leaving the discussion about surplus target for the following years open-ended.

While the EU had said that Greece could maintain a 3.5-percent surplus for many years, the IMF had argued that is was too ambitious and made the Greek debt even less sustainable.

It is now likely that the targets will be lower, a source said. That could allow the IMF to say that the Greek debt is sustainable and that it can confirm its participation to the bailout.

Another assessment

Despite the deal, the IMF's involvement in the bailout still has to be confirmed.

The Eurogroup statement said that the IMF management will "recommend to the fund's executive board [representing all the IMF member states] to approve a financial arrangement before the end of 2016".

But Thomsen said that the fund "will participate provided that a revised debt sustainability assessment suggests that measures are sufficient to conclude debt is sustainable".

"We will need to assess the adequacy of the measures," he said.

The assessment will not be ready before the autumn, leaving the door open to new debt talks between the IMF and the EU before a final decision by the fund's executive board.