Eleventh hour eurozone deal temporarily allays market fears

Investors’ fears were eased as Eurozone policymakers yesterday agreed on a second bailout for Greece worth €109bn, in a deal struck just ahead of that country’s deadline to meet its debt obligations. Initial reaction from markets has been positive, but long term problems exist.

The euro rallied against the dollar immediately after a draft proposal was leaked during the afternoon of Thursday 21 July ahead of the official announcement being made.

In a morning market report, forex firm Clear Currency said: “Market reaction has been risk positive and very Euro positive with the single currency surging higher.

“EUR/USD smashed through 1.4400 and EUR/GBP is looking at 0.8850.”

Commentators agreed policymakers showed a willingness to prevent contagion throughout the region, as concern rose up to the meeting over not only Greece’s debt levels but that of Italy, Portugal, Ireland and Spain.

“Clearly the measures are aimed at containing contagion risks,” said ING’s chief strategist Valentijn van Nieuwenhuijzen.

“European policy makers are finally trying to be proactive rather then reactive with the sovereign crisis,” he said.

Lower borrowing costs on peripheral loans for Greece, Ireland and Portugal is a significant step towards addressing solvency risks in those countries, he added.

The interest rate to be paid on the bailed-out peripheral region’s rescue funds was cut to 3.5%, giving those countries a better chance of repaying their debt obligations.

Loans were also extended from seven and a half years to between 15 and 30 years, buying policymakers more time to resolve the eurozone’s fundamental imbalances, market commentators said.

Irish Taioseach Enda Kenny, the sovereign’s political leader, welcomed the new arrangement.

“We’ve achieved a substantial interest rate reduction and greater flexibility in terms of the fund without conditions attached,” he said.

More favourable conditions meant the deal was dubbed the new “Marshall Plan”, echoing an agreement drawn up to deal with Europe’s long-term debt problems following World War II.

Alongside the plan to ease pressure on Europe’s periphery and allow core regions such as Germany and France to take some pain, the private sector will be expected to play its part.

European policymakers hope banks will take on a proportion of Greece’s debt, amounting to an estimated overall cost of €17bn on the private sector.

“Now we find out the hard way whether the stress tests were good enough,” said investment director at Montague Capital David Jones.

Hedge funds are still unlikely to find Greek debt attractive, as they will not look at such long-term maturity, said market sources.

But BNY Mellon manager of the Newton Real Return Fund Iain Stewart said the bond market is now taking a more realistic view of Greek risk, whereas in other mature economy markets mispricing of risk is persisting.

A number of commentators also emphasised the next step is for the deal to be implemented.

Upon seeing the draft proposal, head of dealing at London & Capital Asset Management Steve Collins asked: “Will individual governments have to approve the package, will the ECB hold the line, will the private creditors comply?”

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