New Greek deal should calm market worries

The new bailout deal for Greece is welcome, analysts say, but major challenges remain before this market worry is shelved for good.

The tentative deal reached Monday between Greece and the European Union should calm fears of Greece exiting the EU, according to a research note published by TD Economics.

However, there are implementation risks in the short term, and many of the details of the deal remain uncertain, it notes Andrew Bell, economist. For now, the deal “is positive for market sentiment,” writes Bell.

Credit rating agency Fitch Ratings echoes that sentiment in a report published Monday. The deal should ease the extreme liquidity pressure facing Greece, notes Fitch, but that major challenges to its creditworthiness remain. The political and implementation risks to the deal “remain high”, Fitch notes.

The deal “leaves scope for disagreement,” Fitch stresses, and “provides for strong monitoring and oversight by Greece’s creditors.” However, “this has not kept the country’s previous bailouts on track,” Fitch notes.

In addition, the privatization plan in the deal “appears ambitious”, Fitch notes, adding that the Greek banks face recapitalization and a resolution action that “at a minimum will wipe out the banks’ equity and remaining subordinated debt.”

Notwithstanding these implementation concerns, market attention will now gravitate elsewhere, suggests TD’s Bell.

“With financial risks in China and Greece subsiding (at least for the time being), we now expect the theme of central bank divergence to reassert themselves. In the case of the U.S., this removes some global risks and paves the way for Fed hikes later this year,” Bell writes.

“For the euro area economy, our base-case of further economic improvement remains unchanged, with real GDP growth of 1.6% in 2015 and 1.9% in 2016,” Bell adds.

The outcome of these latest bailout talks may have implications for other troubled European governments. Bell suggests.

This episode, “sends a signal to other anti-austerity parties in peripheral countries that European creditors will take a hardline, particularly when it comes to debt forgiveness, writes Bell.

“In this context, the Greece experience may reduce some of the political risks around anti-austerity parties in the Spanish elections later this year, but time will be the test,” he concludes.