We have a ‘deal’

So having pulled an all-nighter, Europe reached a ‘unanimous’ agreement on Greece.

Greece
Source: Bloomberg

A third bailout ELA program is now being readied. The €82 to €86 billion ELA will be distributed over three years with the first disbursement to be finalised by the end of the week on the deal being approved by all governments.

The second and third disbursements are subject to Greece delivering on its commitments by the conclusion of the first review of the ESM programme come 30 September – Debt relief is on a very tight leash.

What has been agreed to in Brussels (not passed in Athens)

  • Streamlining VAT and broadening of the tax base to increase revenue
  • Upfront reform measure to pension schemes
  • Long-term sustainability of the pension scheme
  • Implementation of the provision of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.

These measures are due by Wednesday (15 July)

  • Streamlining legal practices through Code of Civil Procedure – cost reduction measure
  • Strengthen financial sector including ‘decisive’ action on non-performing loans and ‘eliminating’ any possibility of political interference.

These measures are due by 22 July

  • Greece has also been asked to scale-up its privatisation program with improved governments. From this, Greek assets will be transferred to an independent fund charged with generating a targeted €50 billion.

 

  • The revenue from said fund will be broken down in the following ways
    • €25 billion used to cover the recapitalisation of banks
    • €12.5 billion to repay sovereign debt
    • €12.5 billion to finance additional investment

 

  • The measures agreed upon are seen as more austere (sell-side analysts’ consensus) than the deal Greece rejected on 24 June and went to the people with – Prime Minster Tsipras’ capital appears spent.

 

  • Politically – consensus is that Prime Minister Tsipras will lose his majority and a unity government will be required. Approximately 72% of sell-side analysts see a new election inside the next 60 days.

 

  • Although this ‘deal’ reduces the risk of ‘Grexit’ in the interim it still remains a significant issue in the medium term. Greek politics could collapse under the strain of this new deal and the subsequent elections that may transpire. The viability of the program is also a large risk if the ‘reform’ process is disjointed or feeble or straight out rejected by new governments.

 

  • All this explains why European markets didn’t explode higher – the initial bounce in equities was only held through European session they didn’t move higher still. The deal has several very tough days and weeks ahead.

 

Ahead of the Australian open

We are currently calling the ASX 200 up 67 points to 5553 as European and US trade gives the ASX one of the most positive intra-day leads in weeks.

US earning session sees major banks reporting from tonight through to Friday, JP Morgan kicking it off followed by Wells Fargo, Bank of America, Citi, Goldman Sachs and Merrill Lynch – this will drive US trade and therefore the leads will filter into Asia and Australia.

Expectations around earnings are incredibly low due to the impact of the high USD. I therefore expect to see the ‘normal’ US earnings season beats occurring with approximately 65% of companies beating estimates on the revenue line and over 70% on the EPS line.

Iron ore held above US$50 a tonne and industrial metals as a whole bounce by 1% or more. China’s ‘stability’ mechanisms remain and should remain for a considerable period – it will shore up ‘confidence’ in the metal complex and Asian markets.

A positive of exporting sectors like materials – not so much for ‘free markets’.

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