UPDATE 1-Euro zone approves new loans for Greece, helps set up cash buffer

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BRUSSELS, March 27 (Reuters) - The euro zone’s bailout fund approved on Tuesday the disbursement of 6.7 billion euros ($8.3 bln) in new loans to Greece as part of its current bailout programme.

The decision confirms a political deal reached by euro zone finance ministers earlier in March and will help Athens build a cash buffer to facilitate a full return to market financing after its 86-billion-euro bailout ends in August.

A first tranche of 5.7 billion euros is due to be paid on Wednesday, while the remainder will be disbursed after May 1, the European Stability Mechanism (ESM) said in a statement. The second tranche of 1 billion euros will be paid out under the condition that Greece makes progress “in reducing its stock of arrears and improving the effectiveness of the e-auction system”, the ESM said.

The European Commission’s vice president, Valdis Dombrovskis, welcomed the decision and urged Greece to successfully end the current bailout programme.

Athens is expected to implement more reforms - including privatisations and liberalisation of the gas and electricity markets - before August in exchange for more loans.

Around one third of the available funds under the bailout programme is expected to remain unspent.

“Today’s decision by the ESM Board of Directors acknowledges the hard work by the Greek government and Greek people in completing an extensive set of reforms,” ESM Managing Director Klaus Regling said.

The new loans will be used to service Greece’s debt, pay domestic arrears and accumulate a cash buffer, the ESM said.

The cash buffer could reach 20 billion euros by the end of the programme, a figure EU officials believe could support sustainable growth and help the country return to tap financial markets at lower costs.

A further relief on Greece’s huge public debt, one of the largest in the world in relation to the size of the economy, could be offered by the end of the bailout programme under new conditions yet to be decided.

$1 = 0.8070 euros Reporting Francesco Guarascio Editing by Gabriela Baczynska and Mark Heinrich