Greece and its European creditors have reached agreement on measures required to unblock a new tranche of aid. It appears that the size of the tranche could double the €5-6 billion initially planned.

The agreement on a package designed to save €5.4 billion on the Greek budget was confirmed by an EU official on Friday.

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It follows a vote last week by the Greek parliament of two laws reforming the pension and the income tax systems, which are still being examined by experts from the European Commission, the European Central Bank and the European Stability Mechanism.

To complete the first review of the bailout programme, Greek authorities now have to adopt smaller laws, especially one to establish a privatisation fund, before the next Eurogroup meeting of finance ministers on 24 May.

The agreement doesn't cover the other step required by Greece's creditors, including the International Monetary Fund, which is the setting up of a mechanism to take automatic measures in case Greece misses it fiscal targets.

Creditors want more guarantees about the credibility of mechanism, which envisages a presidential decree to make emergency budget cuts followed by more structural reforms if needed.

"We want to be sure it would end up with more economically sensible policies," the official said, adding that an agreement could be reached over the weekend.

Once the mechanism is agreed and adopted by the Greek parliament, along the other laws from the basic package, eurozone finance ministers would be able approve the disbursement of the tranche of aid.

The amount of the disbursement has not been defined and will be up to ministers to decide. But the initial estimate, between €5 billion and €6 billion would probably not be sufficient.

Damaging arrears

Between now and the next disbursement which would take place at the end of the second review of the programme, planned next October, Greece would need €6.7 billion to cover repayment of loans.

It would also need money to cover €700-800 million of arrears each month. The amount of current arrears is estimated at €7 billion. "Building up arrears is hugely damaging for growth," the EU official said.

Given Greece's need, the amount of the tranche is likely to be around or above €10 billion. "Whether it will be €9, 10 or 11 billion will be the Eurogoup's choice," the official said.

the decision will be a political decision as well as economic one.

So far the IMF has linked its approval of the first review on a commitment to reduce the cost of debt repayment for Greece.

It also wanted Greece to make deeper reforms to reduce more its deficit, but the agreement between Greece and EU institutions will make that position more difficult.

"All creditor institutions, including the IMF, have to defend balanced positions, in order not to add austerity to austerity," the EU finance commissioner Pierre Moscovici wrote in a blog post Friday.

Debt relief

Last Monday (9 May), ministers asked experts from EU creditors and the IMF to prepare a roadmap for a three-stage debt relief in the short, medium and long term.

But early discussions have shown disagreements between the EU and the IMF as well as between European, with some countries being wary of measures on Greek debt before the bailout programme is implemented.

Other countries want a quick disbursement even if the IMF does not agree.

"We would like to see a swift agreement unlocking a needed tranche for Greece, with or without the IMF consent if necessary," Slovak finance minister Peter Kazimir said on Twitter on Friday.

The EU and the IMF have 11 days to find a compromise on debt relief or on whether to give Greece a new loan without an agreement on debt.

The decision on the amount of the disbursement could be influenced by that first decision. But as the EU official pointed out, the less Greece has to repay it arrears the more debt it will have.