Spotlight: Eurogroup agrees ESM support to Greece amid debt sustainability doubts

The Eurogroup on Thursday agreed to offer Greece a three-year grant from the European Stability Mechanism (ESM), following the Greek parliament's approval of austerity measures demanded by creditors earlier in the day. But doubts about the Greek debt sustainability hiked as some believed the Greek bailout deal could not work without "haircuts".

"We reached today a decision to grant in principle a three-year ESM stability support to Greece, subject to the completion of relevant national procedures," the Eurogroup said in a statement after a teleconference among its finance ministers.

European Union (EU) institutions are expected to swiftly negotiate with the Greek government on a memorandum of understanding (MoU) "detailing the policy conditionality attached to the financial assistance facility," the statement said.

The negotiation will follow the "completion of the relevant national procedures and the formal decision by the ESM board of governors expected by the end of this week," the statement noted.

The Eurogroup also urged Greek authorities to "swiftly adopt the second set of measures by July 22 as foreseen in the Euro Summit statement."

Heads of the 19 eurozone member states on Monday reached a fresh bailout deal for Greece worth up to 86 billion euros (about 94 billion U.S. dollars) and promised swift negotiations on a MoU as soon as Greek lawmakers ratify their summit statement and approve a first set of austerity measures on July 15.

A total of 229 Greek lawmakers of the parliament's 300 seats on early Thursday voted in favor of the summit statement and the first set of taxation and pension system reform measures, with 64 against and six abstentions.

The approvals are viewed as prerequisites for Greece and its creditor's further talks on the new bailout plan.

Meanwhile, the European Central Bank (ECB) on Thursday announced to increase emergency funding for Greek banks by 900 million euros, a move to help remove the country's ongoing capital controls.

The ECB governing council decided to raise the Emergency Liquidity Assistance (ELA) to Greek banks by 900 million euros (about 981 million U.S. dollars), ECB President Mario Draghi told a press conference on Thursday in Frankfurt.

He said the ECB accommodated the Greek central bank's request and raised the cap of ELA over one week.

The liquidity support from ECB was seen as the "lifeline" for Greek banks. Since June 29, all bank branches in Greece have been closed, with the exception of 1,000 branches that serve only pensioners and the unemployed with no debit cards.

However, Athens' local media estimated that capital controls would not be lifted immediately. Depositors will most likely continue to face a withdrawal limit of up to 60 euros per card per day.

A former Greek finance ministry official told Xinhua anonymously he interpreted the ECB's decision as a first step towards the reopening of banks Monday and a review of the daily withdrawal limit.

Greece is in urgent need of money as it faces a 3.5 billion euros payment to the ECB on July 20, but a full bailout deal including ESM program will take weeks to get operational.

The European Commission on Wednesday proposed to grant Greece a three-month bridging loan worth 7 billion euros from a 28-member backed EU-wide fund to address Athens' urgent financing need.

"Given the obvious absence of any other better solution, the best possible avenue left is the EFSM (European Financial Stabilisation Mechanism) programme," said Valdis Dombrovskis, the Commission's vice president for the euro.

However, the Commission's proposal was reported to have received resistance from non-euro member states such as Britain.

The International Monetary Fund (IMF) encouraged European creditors to consider debt relief, warning the country's debt has become "highly unsustainable."

"Greece's debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far," the IMF said in a new report.

Greece will need 85 billion euros by 2018, according to the IMF. The country's debt is set to reach 200 percent of gross domestic product in the next two years, compared to the current level of 175 percent.

Christine Lagarde, IMF chief told CNN on Thursday that, "one way has to be found in order to release the burden."

German Finance Minister Wolfgang Schaeuble insisted on Thursday that a temporary exit of Greece from the eurozone was a "better way" for the country as it would pave the path for a debt haircut which was necessary to save Greece from insolvency.

In response to economists' doubt over Greece's ability to solve problems without a debt haircut, Schaeuble said, "no one knows at the moment how they could go without a haircut, and everyone knows that a haircut is incompatible with a membership in the monetary union."

The minister first raised the controversial idea of a "timeout" of Greece last weekend when European leaders in Brussels took 17 hours to hammer out solutions to the Greek debt crisis.

He suggested at that time that Greece could take a temporary exit from the eurozone, but remain in the European Union, for at least five years, during which period Greece could restructure its debt and receive further "growth-enhancing, humanitarian and technical assistance." (1 euro = 1.09 U.S. dollars) Enditem