Global markets breathe sigh of relief as Greek deal is reached
World equity prices rallied yesterday as investors welcomed a conditional agreement to negotiations aimed at keeping Greece afloat with a bailout and to stay within the Eurozone.
European equities surged almost two per cent while Wall Street jumped more than one per cent after Eurozone leaders made Greece surrender much of its sovereignty to outside supervision in return for agreeing to talks on an €86bn (£61bn) bailout.
However, investors were anxious that a deal was not entirely in hand and that international lenders, led by Germany, obliged leftist Prime Minister Alexis Tsipras of Greece to abandon his promises of ending austerity.
The deal is contingent on Greece meeting a tight timetable to enact reforms of value added tax, pensions and budget cuts.
“This is not over yet. In fact it might be far from over,” said Anthony Lawler, a portfolio manager who invests in hedge funds at investment firm GAM in London.
“It is not at all certain that the Greek government will accept what is proposed.”
And Andrew Milligan, global head of strategy at Standard Life Investments in Edinburgh, agreed with this outlook.
“We’re seeing a relief rally,” he said “As we go through the details, however, it’s very clear that there is a sizeable number of hurdles to jump over, especially in Athens.”
Indeed, Greece missed another debt repayment to the International Monetary Fund (IMF) yesterday, when it failed to make a €456m payment.
An IMF spokesman confirmed that the country’s arrears to the organisation currently total around €2bn.
Meanwhile, Dutch finance minister Jeroen Dijsselbloem has been reappointed as the head of the Eurogroup for another two and a half years.
Dijsselbloem faced competition from Spanish finance minister Luis de Guindos, but in a statement the European Council said: “The decision was unanimously supported by all Eurogroup members.”
The Eurogroup, made up of finance ministers in the euro area has been a crucial player in Greece’s negotiations for a bailout with its creditors and makes policy decisions about the single currency.
Dijsselbloem, known for a relatively uncompromising approach to the proposed bailout conditions, said: “I’m very happy that I once again got the confidence of my colleagues.”
After the agreement with Greece was reached this weekend, Dijsselbloem said in a statement: “We worked very hard on a number of issues regarding reform, the fiscal situation, the debt problems and financing needs. We were able to agree on a lot of these issues, putting in extra effort on all sides to get Greece back on track.”
The Greek deal: Here’s how analysts reacted
“We must not take Greek domestic approval for granted. After all this deal goes against much of what Tsipras’ own party believes in, and against what the population overwhelmingly agreed to in the recent referendum.”
Jim Leaviss, head of retail fixed interest at M&G Investments
“The hard work is not over – the deal still has to be got through national parliaments, with Athens and Berlin being the main ones to watch.”
Chris Beauchamp, senior market analyst at IG
“This is nothing but a pure embarrassment for Mr Tsipras who made his people suffer for six months.”
Naeem Aslam, chief market analyst at AvaTraded
“An agreement may have been reached, but investors are now thinking ‘what next’? While European officials are patting each other on the back traders are now “selling the fact” and the euro is on the slide.”
Alex Edwards, head of the corporate desk at UKForex
“There remains the issue of the banking sector. While a bridging agreement has been reached, the banks have suffered severe losses over the past few weeks.” Danae Kyriakopoulou, senior economist at the Centre for Economics and Business Research
The new timeline for Greece and the Eurozone
Greek parliament must pass a host of measures agreed to in Brussels. Eurozone finance ministers will take a view on whether to recommend a third bailout programme for Greece.
Hopefully by this date Eurozone states can launch their individual approval processes for the programme. Full parliamentary votes are required in Germany, Finland, the Netherlands and Austria and potentially Estonia, Slovenia and Portugal.
Greece is to submit a first proposal for modernising and strengthening its public administration. It also has to cut its costs. It may also have received some bridging finance to meet payments to creditors.
The Greek parliament must adopt the Code of Civil Procedure (overhaul of the civil justice system) and transpose the Bank Resolution and Recovery Directive.
By this date (or before) the decision can be made to enter formal negotiations so that a new programme can be drawn up.
It will take time to finish writing up the full agreement and for the first disbursement of any new bailout cash to arrive. In Cyprus, it took seven weeks, which would place the date in September.