News that a deal was finally struck to ensure Greece can repay its largely official creditors saw the euro test the $1.3010 area twice in Asia before Europe took profits, knocking the euro below $1.2940. The euro has now traded on both sides of Monday’s range and a close below yesterday’s low (~$1.2944) would undermine the technical tone. It would signal potential for a deeper pullback toward $1.2880-$1.2910.
The Greek deal has many moving parts, but there are key pieces. A formal decision will not made until December 13 and needs formal approval by a few parliaments. A German vote is possible at the end of the week or early next week. Merkel may have to once again rely on support from the opposition Social Democrats for her European agenda.
Before that final approval, Greece is expected to conduct a bond buy-back (new haircut for the private sector) at 35 cents on the euro. This is clearly a poor, even if telegraphed, development for holders of Greek government bonds, and that especially means Greek financial institutions. The financial sector shares are off 8-9% today, while the overall Athens’ Stock Exchange is off 1.5%.
The official sector resisted a haircut, but accepted a significant restructuring, which includes lower interest rates, fees, and longer maturities. The ECB’s profits from the Greek bonds it purchased under SMP will be recycled back to Greece.
In some ways, despite the modifications and bond buy-back, the general strategy remains the same. The aid will be distributed in several tranches into first part of next year and contingent on further reforms. A carrot in the form of more forbearance for when a sufficient primary budget surplus is achieved, has also been offered.