Greek Deal - A Eurozone Success?

'Success is the ability to go from one failure to another with no loss of enthusiasm' - Winston Churchill

At last Greece has a deal to provide the embattled Eurozone nation with a EUR130 billion second bailout with the intention that the funds put the sovereign's debt on a sustainable footing.

The details of the package were broadly in line with market expectations and gradual announcements over recent months. The private sector haircut was increased to 53.5 percent which would help bring down the debt/GDP ratio to 120.5 percent by 2020. The coupons on the news bonds will be 2 percent until 2015, 3 percent until 2020, 4.3 percent thereafter bringing the haircut to around the much mooted 70 percent level in npv (Net Present Value) terms. The deal is contingent on the Private Sector Involvement (PSI) agreement being reached (ideally without the Greek government having to enact retroactive Collective Action Clauses (CAC's) which will likely trigger default (or selective default) ratings from the ratings agencies and the legal melee that will undoubtedly follow in the CDS markets.

The Eurozone finance ministers also agreed that certain government revenues that emanate from the European Central Bank's bond purchases (under the SMP) will be disbursed by the national central banks (NCBs) and allocated by Member States to further improve the sustainability of Greece's public debt in addition to the interest rate payable on any existing bilateral loans to Greece being reduced to just 150 basis points over Euribor; a further positive yet not unexpected conclusion.

UK news

In the UK, the public sector finances data showed that Britain posted its biggest budget surplus in four years at GBP 7.75 billion as tax receipts rose 4.7 percent in the financial year to date against a 1.6 percent rise in expenditure. An extrapolation of the public finances to the end of the year suggests that the deficit could undershoot the OBR (Office for Budgetary Responsibility) forecast from November by as much as GBP10 billion. There is even perhaps an argument that the 'saving' or perhaps part of the saving could be used to stimulate growth in the form of tax cuts. Either way the undershoot should be seen as a positive for the UK and for the GBP.

So what now?

Some participants have focussed their attention on a leaked document from the EU meeting that suggested Greece could need EUR 245 bn in worse case scenario and the Debt/GDP ratio in 2020 could be as high as 160 percent. However, what matters now is not necessarily how over optimistic the fiscal arithmetic assumptions are for Greece, nor how unlikely growth projections are. It is not necessarily how much risk there is in the physical implementation of the agreed package and its 'rigorous conditionality'. It is not even necessarily about the fact that eventually Greece will need more money. For now at least it is about the prevention of contagion and in that regard the stabilisation of BTP (Italian bond) yields at the lowest levels since last September is significant.

As the day progressed yesterday, talk from numerous finance ministers that the March EU summit was intended to contain talks in relation to 'strengthening the firewalls' to prevent contagion, gave the EUR and risk assets an additional boost and waning enthusiasm was given another brief shot in the arm.

Overnight events were mixed in terms of their impact on risk. Newswires that the International Atomic Energy Agency (IAEA) had failed to reach agreement on Iran and had been refused entry to some sites caused risk and sentiment to begin the Asian session on a weak note, with AUD the notable underperformer. China PMI data however came in above expectations and the fact that the S&P and Dow Jones indices both traded at the highest level since before the global financial crisis also added fuel to the fire.

Equities to continue to outperform

From this point I would expect equities to continue to outperform as the wall of money on the sidelines watches entry levels get more and more expensive. In FX however I feel that the markets will be much more subjective. We may have removed (or in my mind at least, delayed) a default event in Greece and the potentially disastrous repercussions however I would still expect the EUR to underperform in the short to medium term. Technical levels are going to become more important over the next few sessions as market participants look for further assistance to guide positions in a still opaque fundamental environment.