Greece reluctantly reaches a deal

The mood in Asian markets has turned upbeat today, compared to the previous week.

Greece debt crisis
Source: Bloomberg

The key risk drivers for Greece and China are showing encouraging signs that the ‘worst’ could be over, or at the least, averted for now.

European leaders have unanimously reached an agreement with Greece, after nearly 17 hours of negotiations. This will set the basis for the relevant parties to begin formal talks for a third bailout deal.

As the details are still being filtered through the newswires, it appears that Greece has rather few concessions from the agreement. Malta Prime Minister Muscat said that Greece accepts almost every points on the tap, adding that there is no debt forgiveness for the embattled country.

European Commission President Juncker stressed that the main objective was to avoid a Grexit. Greek banks will remain shut and will be recapitalised by the Greek Asset Fund.

While the agreement is certainly a win for creditors, it is not quite certain what it means for Greece. I believe the devil is in the details on how to help the nation stands on its own feet without being overwhelmed by a crippling debt burden.

If it is business as usual, with conditions of the third bailout deal little changed from the previous two packages, we can’t really expect Greece to miraculously recover, can we? As the saying goes, if you always do what you always did, you’ll always get what you always got.

The market heaved a sigh of relief, reacting positively to the news. European equities built on its recent recovery, heading higher in early trade. S&P 500 futures also bounced. The FX space was not so quick to move with the latest development.

EUR/USD remained range bound, trading a range of 1.1089/1.1197. It is to be noted that the currency pair rallied over 1% last Friday, on increasing prospects of an agreement, which means any gains after the fact maybe limited. This is apparently so, given the stagnant reaction we are seeing in the euro-dollar.

Although the Greek parliament has given a strong mandate to the government to negotiate with creditors, it is still not a sure thing they will also vote in favour of the reform agreement reached today. What is for sure if they should reject (which in my view is quite unlikely), then the odds of a Grexit will sky-rocket.

The not so invisible hand in Chinese markets

Chinese officials may be patting themselves on the back with a job well done after Chinese stocks rallied for a third straight session. More suspended counters resume trade as Bloomberg reported that the proportion of halted companies fell to 36% of total A-shares market, from around 50% in the previous week.

Today’s recovery was concentrated in the smaller cap counters, as large blue-chips ended in red. The A50 Index slipped 1.1% on Monday, which is puzzling given that whoever is selling the blue-chips seems to find the testicular fortitude to do so, without fear of potential police prosecution.

So far, the political will to take outsized measures is starting to work through the system, although we cannot discount the great reputational and credibility risks China has taken its sharp interventionist response. For now, Beijing can take a breather and monitor the equity markets to make sure that market sentiments are not overwhelming bearish.

However, I am concerned how the latest episode is going to affect China’s plans to open up the capital markets, which should in theory, help provide much needed stabilisation. We have seen how the retail-driven stock markets went through periods bordering on manic. A greater proportion of institutional investors and foreign participation will bring stability.

If the recent ‘big stick’ approach has discouraged foreign investors and delayed market-liberalisation steps, such as inclusion in the MSCI indices, we may see the return of wild swings in the future. Of course, market participants will no doubt be wary of similar ‘whatever it takes’ measures from Beijing if we see a fresh bout of crazy moves.

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