Euro zone finance ministers agreed on Saturday to disburse a further 12 billion euros ($17.4 billion) to Greece and said the details of a second aid package for Athens would be finalised by mid-September.
After a conference call, the 17 euro zone ministers agreed that the fifth tranche of the 110-billion-euro bailout agreed with Greece in May 2010 would be paid by July 15, as long as the IMF's board signs off on the disbursement. The IMF is expected to meet on July 8 to approve it.
The payment will allow Greece to avoid the immediate threat of default, but the country still needs a second rescue package, which is also expected to total around 110 billion euros and which will now likely only be finalised in September.
Between now and then, finance ministers will work on the precise modalities and scale of the private sector's involvement in the second aid package, which Germany hopes will eventually total around 30 billion euros.
Greece said it expected a final decision on a second bailout programme by mid-September to keep the country financed.
Eurogroup decided through a teleconference today to work out a new programme on time, before mid-September, Greek Finance Minister Evangelos Venizelos said shortly after the finance ministers approved the 12 billion euro disbursement.
What is crucial now is to implement parliament's decisions on time and effectively, he said.
The 12 billion euro payment will help Athens cover a 5.9 billion euro bond redemption in August, but the government still has a monumental hill to climb if it is to return to debt sustainability, with its debt-to-GDP ratio above 150 percent.
Athens has repeatedly failed to meet budget targets laid down in the first bailout programme, raising the risk that the crisis will spread across the euro zone if unresolved.
Greece's second financing programme is to run from 2011 to 2014 and will come on top of the existing assistance package. As part of the package, Greece is expected to raise around 30 billion euros from privatisation, while the EU and IMF will provide around 50 billion euros, split 2/3rds to 1/3rd.
The precise modalities and scale of private sector involvement and additional funding from official sources will be determined in the coming weeks so as to ensure that ... required programme funding is in place, a statement from the Eurogroup read, indicating a delay in the second programme as they had been expected to finalize its details at a meeting on July 11.
Ministers agreed that the main parameters of a multi-year adjustment programme for Greece will revolve around a continued strong commitment to implementing fiscal consolidation measures... and concrete structural reform and privatisation.
EU leaders made a commitment to the second programme at their last summit on June 23-24, which should satisfy the IMF's condition that the euro zone must promise to finance Greece 12 months ahead for the IMF to contribute.
Despite the release of the next tranche payment, which will provide breathing space for Athens, there is growing concern among EU officials that the strictures being imposed on Greece, including 28 billion euros of austerity measures between now and 2015, are too harsh and could cause longer-term damage.
The finance minister for Poland, which has just taken over the six-month presidency of the European Union, suggested on Saturday that too much emphasis had been put on austerity and too little on growth in Greece.
The market still sees an 81 percent chance that Greece will eventually default, however, and German Finance Minister Wolfgang Schaeuble told Der Spiegel in an interview that Berlin was making preparations for such an event -- even though it does not expect it to happen.
HOW MUCH FROM THE PRIVATE SECTOR
Private financial institutions held talks with finance ministry and central bank officials in euro zone countries last week to discuss under what conditions the private sector would be willing to help finance Greece and by how much.
Those discussions continue, with the involvement of the private sector in the next package a must for several euro zone countries as voters grow increasingly opposed to shouldering the burden of bailing out Greece on their own.
But private sector involvement must be voluntary to avoid triggering another downgrade of Greek debt to default status by ratings agencies, a development which could put the whole Greek banking sector at risk.
The Institute of International Finance, a global association of financial institutions, said on Friday that the private financial community is ready to engage in a voluntary, cooperative, transparent and broad-based effort to support Greece given its unique and exceptional circumstances.
Schaeuble has said German banks wanted to roll over 3.2 billion euros' worth of Greek bonds maturing to 2014.
French banks have reached an agreement on how to roll over part of their Greek debt holdings, French President Nicolas Sarkozy said, but did not indicate the total amount.
A further meeting of euro zone finance ministers on July 11 will help to finalize the second financing package for Greece, but some officials said they would not be surprised if the final decision were taken by finance ministers only in September.
(Additional reporting by Angeliki Koutantou and James Mackenzie in Athens; Editing by Sonya Hepinstall)