Greece bailout: Eurozone backs €7bn 'bridging loan' while ECB approves €900m liquidity lifeline to banks

The European Central Bank moved unexpectedly to help Greek banks stave off collapse, hours after MPs in Athens delivered on the government’s promise to push a raft of spending cuts and reforms into law.

Mario Draghi, the president of the Frankfurt-based central bank, revealed that the emergency liquidity lifeline to Greece’s private banks will be increased by €900m (£625m) over the coming week – almost three weeks after it precipitated a crisis by freezing its emergency assistance, requiring banks to put a €60 a day limit on cash withdrawals.

In a further boost for Greece, eurozone finance ministers will sanction a €7bn “bridging loan” to Athens, which will enable the government to redeem a €3.5bn bond held by the European Central Bank on Monday. Any failure to make this repayment would force the ECB to pull the plug on Greek banks, putting the country on a fast track out of the eurozone.

A revolt over the austerity package by 38 Syriza Party MPs, including the former finance minister Yanis Varoufakis, brought Prime Minister Alexis Tsipras’s ruling coalition perilously close to collapse, but the backing of opposition MPs for the legislation meant it still passed comfortably. Mr Tsipras is expected to reshuffle his cabinet in the next few days and his interior minister, Nikos Voutsis, said new elections were “very likely” either in September or October.

The Eurogroup of finance ministers also released a statement confirming that they had agreed in principle to a €87bn third bailout for Greece which will cover the country’s financing needs over the next three years, in return for further reforms and austerity measures.

The issue of channelling €7bn bridge funding for Athens over the next three months has been a domestic headache for the UK as it will be secured on the European Union budget, thus creating a contingent liability for British taxpayers. But it has been confirmed that Britain and other non-euro EU nations such as the Czech Republic and Denmark will be indemnified against any potential losses.

Mr Draghi made it clear that the decision to ease pressure on Greek banks had been a direct result of the parliamentary vote on Wednesday. “We had a series of news with the approval of the bridge-financing package, with the various votes in various parliaments, to begin with in the Greek Parliament, which have now restored the conditions for a raise in Emergency Liquidity Assistance,” he said.

But Greece’s position in the single currency remains precarious. German MPs will vote on Friday whether to give Chancellor Angela Merkel a mandate to negotiate a third bailout for Greece, with many expected to reject the proposal. The International Monetary Fund is pushing for debt relief but the German finance minister, Wolfgang Schäuble, insisted that this would only happen if Greece left the euro – which, he added, might be a “better way” for Greece than remaining in the 19 member single currency.

Many European capitals are unsure whether Athens will deliver the reforms. Mr Tsipras told MPs that the new laws he was recommending “won’t benefit the Greek economy, but I’m forced to accept them”.