European Commission unlocks first tranche of €1.8bn package to Kiev

© Leonhard Foeger / Files
The European Commission has transferred €600 million to Ukraine as part of the third Macro-Financial Assistance package, as Kiev is trying to avoid default on a $120 million coupon payment due Friday.

"The European Commission, on behalf of the EU, today disbursed a loan of €600 million to Ukraine. This corresponds to the first installment under the new Macro-Financial Assistance (MFA) program for Ukraine, which amounts to a total of €1.8 billion," a statement said Wednesday.

The EC action shows that Ukraine’s European partners are determined “to stand by Ukraine in these challenging times,” according to Valdis Dombrovskis, the European Commission Vice-President responsible for the Euro and Social Dialogue. He said they hoped that fresh money would help Ukraine reform the economy and bring it back to growth.

READ MORE: Ukraine agrees tough austerity package to gain $17.5bn IMF bailout

The €600 million transferred Wednesday adds to the total of €1.6 billion already provided by the EU since the start of the Ukraine crisis, said Pierre Moscovici, European Commissioner for Economic and Financial Affairs. He added that the EC planned to unlock another €1.2 billion in the coming months if Kiev successfully implements reforms agreed with the EU.

“This is more than the assistance extended by any other bilateral partner of Ukraine,” he said.

The EU and Ukraine signed a €1.8 billion loan and a memorandum of understanding in May. The loan will be paid in three €600 million tranches in 2015-2016, said the European Commission.

READ MORE: Ukraine’s President Poroshenko signs €1.8bn loan from EU into law

The bailout is part of a bigger package, which includes €25 billion from the IMF and €15 billion from the EU, said European Commission Vice-President Valdis Dombrovskis. The IMF package includes the four-year $17.5 billion loan approved by the IMF at the end of April.

The news comes as Ukraine is on the verge of default, as the talks on Kiev’s debt estimated at up to $70 billion have stumbled.

Ukraine would like a 40 percent debt write-down on bonds worth about $15 billion in order to make the debt sustainable. Kiev’s debt is expected to be at least 95 percent of GDP this year. However, creditors who own $9 billion in Ukrainian bonds, headed by Franklin Templeton in the US, have repeatedly said they wouldn’t accept a haircut. The parties have only agreed to swap part of Kiev’s debt for GDP-linked bonds.

In May Ukraine’s parliament passed a bill granting the government the authority to suspend foreign debt payments, Kiev said then it wanted to protect state assets in case of an “attack” from dishonest lenders, and to help the ailing economy out of crisis.

Until now, Ukraine has been meeting all of its debt obligations, including a $75 million coupon payment to Russia on June 22.

READ MORE:Kiev makes $75mn payment on $3bn Russian debt - Russian Finance Ministry

However, it could default if it misses a $120 million coupon payment on July 24. Ukraine’s Finance Minister Natalie Jaresko admitted earlier that her country could default this month.