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Habemus a paciscor (We have a deal)

Habemus Papam is the announcement given in Latin by a Vatican official upon the election of a new Roman Catholic pope.

Habemus a paciscor is the title I decided to give this article, a day after a Donald Tusk, President of the European Council, addressed a press conference minutes after European markets opened for trading.

Tusk gave the markets and the media much awaited news; after 17 hours of negotiations, Tusk labelled the deal as an 'agreekment' as he stated that leaders have agreed in principle that they are ready to start negotiations on an ESM programme, which in other words means continued support for Greece.

There are clearly strict conditions to be met. The approval of several national parliaments, including the Greek parliament, is now required for negotiations of an ESM programme to formally begin. This decision now gives Greece the opportunity to iron out the differences it has had of late with its European partners and build on the much needed support from its creditors. It also avoids the social, economic and political consequences that a negative outcome would have brought.

Yesterday’s deal for a new Greek bailout undoubtedly reduces the risk of a near-term exit from the euro. However, we must highlight the fact that significant hurdles must be overcome before the deal is finalised. It seems that the negotiations of the restructuring of Greek debt were put on hold, which in itself could prompt differences from not only both sides of the deal but also within member states (Germany and France have vociferously stated differing views on this issue).

Looking for the positives, Greece seems to have succumbed to most of the creditors’ demands in exchange for a new €86bn bailout from the ESM, which deal is intended to cover Greek financing needs for up to 3 years, inclusive of €25bn needed for the recapitalisation of Greek banks.

On the other hand, Greek PM Alexis Tsipras seems to have given in on two cardinal points which its creditors had been long insisting. Firstly, the Greek government will transfer €50bn worth of Greek assets into an independent fund, which fund will raise money either through the sale of such assets or via the profitable usage of such assets.

€25bn will be used to recapitalise Greek banks, whilst the other half will be reinvested into the Greek economy. Secondly, the IMF will continue to be involved in financing and monitoring the Greek Government. Tsipras managed however to negotiate the fact that the €50bn fund will be kept in Greece rather than in Luxembourg, as the creditors had initially proposed.

In the meantime, the Eurogroup will be meeting to agree on formalities regarding short-term bridge financing for Greece, which needs about €7bn by next Monday to meet the ECB bond payment and payments to the IMF.

From a markets perspective, equities and credit responded positively but it would be prudent to err on the cautious as the Greek crisis is clearly not over. There are still various financial and political hurdles to be cleared before the deal is fully implemented - the Greek Parliament still needs to pass the measures, and given that the Greeks voted against additional austerity (and the new deal includes tougher conditions than those rejected by the Greek public in last weekend’s referendum), there is still chance that Tsipras’s party loses its majority in government, which would increase uncertainty. Furthermore, the deal will also need to be approved by a number of regional governments, most importantly the German Bundestag.

Questions will linger on as to where the deal is likely to prompt a significant improvement in Greece’s economic and fiscal situation or not and whether capital controls will remain in place. Also, the sensitive issue of debt relief has not yet been mentioned although the Eurogroup stated that it stands ready to consider, if necessary, longer grace and payment periods to ensure that Greece’s financing needs remain at a sustainable level.

What is sure is that this is definitely not the end of the Greek debt crisis, so embrace yourselves for more periods of heightened volatility.

This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are 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. 

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