Market commentary: Greek deal - winning compromise or fight’s deferral?

On Monday the European equity markets enjoyed a positive section with almost all indexes posting gains, while US stocks experienced a low volatility day, closing substantially flat on the day.

Yesterday, the attention of the markets was once again devoted to Greece and the newest “compromising” deal reached on Friday and due to test parliamentary approval this week. Although the Greek side has claimed victory over the negotiation process, the reached agreement looks to me very much as “Pyrrhic victory”, with Greece actually bending to other European Members and ECB’s demands way more than it would like to admit.

The troubled Mediterranean country had made 3 major “non-negotiable” requests to its creditors: the immediate and unconditional replacement of the bailout outstanding payments with a new bridge loan, the elimination of austerity targets and foreigner policies supervision and a substantial debt write-down, none of which was really accepted and included within the new deal.

With regards to the immediate suspension of the bailout program in favour of an unconditional bridge loan and the disbursement of any profit gained by the ECB on Greek Government Bonds, Greece had to capitulate almost completely, and agree to receive the remaining bailout payments (with all the attached conditions and restrains) after the submission of satisfying structural reforms proposals.

On the second demand, concerning the elimination of austerity targets and foreigner supervision, the international creditors saw the agreement settling very close to their initial positions. In fact, despite some concessions on short-term austerity requirements, most of the conditions and measures dictated by the bailout package have been reaffirmed, along with policies oversight exercised by the creditor “intuitions” (namely IMF, ECB and European Commission). Not many changes from the current form of international supervision.

Finally, the most controversial demand regarding a possible debt write-down, was already almost entirely abandoned by Greece at the beginning of the negotiations, and last Friday the country’s officials reiterated that “ the Greek authorities unequivocally commitment to honour their financial obligations to all their creditors fully and timely”.

In short, if one was to strip down the Greek proclaimed victory of all political and propagandistic statements, Greece has to pay a very steep price for the right to remain within the Euro and a chance to survive to fight another day. And in my opinion, this is the reality of the situation, because the real challenge of how to make the servicing of the country’s long-term debt sustainable is far from been resolved, or discussed for that matter.

Notwithstanding the de-escalation of the Greek exploding crisis, the deal reached on Friday is still subjected to parliamentary approval, both in Greece (where members of the parliament may very well realise how little true to their promises this deal is) and in the rest of the Europe, Germany above all, where a growing discontent for how the Greek issue has been dealt with, may indeed prompt politicians to reject this fragile compromise, and bring the crisis back to its exploding point.

Investors, on the other hand, do not seem to deem the Greek issue as a catastrophic event as they once did, and an increasing numbers of analysts are beginning to believe that Greece does not have the power to dislocate markets, and that a larger part of the connected short-term uncertainty has already been priced in during the short correction experienced earlier this year.

To corroborate this view is the positive performance of both the European equity markets on Monday and the overnight positive session in Asia, with US stocks more concerned about disappointing housing data than the risk of a Greek default. Time will now decide the real implications and impacts of the new shaky compromise.

Certainly is that big money managers do not seem to see Europe as bad place to invest, from billionaire hedge fund manager Soros, who stated he is shifting money from US equities into European stocks, to several CNBC analysts and contributors stating that UK and German stocks appears to be among the most attractive trades within the current market environment.

This article was issued by Mr. Paolo Zonno Trader/ Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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