Abn amro corporate bond watch agreekment is no done deal

Marketing Communication

Euro Corporate Watch AGreekment is no done deal

Group Economics Macro & Financial Markets Research Hyung-Ja de Zeeuw +31 20 628 3551 Hyung-ja.de.zeeuw@nl.abnamro.com

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13 July 2015    

‘AGreekment’ is total capitulation by Mr Tsipras, but no panacea Implementation risk looms against background of deepening recession Risk of near-term Grexit reduced, but remains looming in the long run Initial market reaction was one of relief, but we think that concerns and scepticism will grow

‘AGreekment’: total capitulation by Mr Tsipras

In the medium-term, the Greek government has to implement

The eurzone leaders have finally reached an agreement on

heavy reforms regarding the labour market, the pension

Greece after a 17 hour marathon session by the eurozone

system, certain product markets, energy markets, and adopt

leaders. The agreement contains major reforms and swift

the necessary steps to strengthen the financial sector. This all

deadlines in return for a third potential rescue package of EUR

will need to be implemented with a satisfactory and clear time

82-86bn.

table for legislation and implementation.

By 15 July the Greek Parliament needs to turn the following

On top of that, an independent fund will be set up to which

measures into legislation:

Greek assets will be transferred. Privatisation of these assets should generate proceeds of EUR 50bn. EUR 25bn will be

 

streamlining the VAT system and broaden the tax

used for the recapitalization of banks and EUR 12.5bn will be

base;

used for reducing the debt/GDP ratio. The other EUR 12.5bn

measures that underpin the long-term sustainability

will be used for investments.

of the pension system;  

legal independence of Elstat, the Greek statistics

Also, the Greeks will need to accept that their administration

office;

will be modernised and de-politicised under the supervision of

automatic spending cuts in case of deviations from

the European Commission. A first proposal should be on the

primary surplus targets.

table by 20 July. The Greek administration also has to commit itself to a cost cutting schedule for the administration itself.

By 22 July the Greek parliament needs to approve: Lastly, almost all the legislation that was implemented during  

reforms of the justice system, significantly accelerate

the Tsipras administration will need to be amended, reversed

the judicial process and reduce costs;

or replaced by compensating measures.

meet the Bank Recovery and Resolution Directive.

Implementation risk looms against background of

After the first four measures are transformed into legislation by

deepening recession

Wednesday, the national parliaments of Germany, the

At first glance the ‘AGreekment’ looks like total capitulation by

Netherlands, Finland, Austria, Slovakia, Estonia and France

Mr Tsipras. The referendum clearly made things worse.

will have to give their approval. Only then, negotiations for a

Instead of strengthening his negotiation position, he lost the

third ESM programme can start.

last bit of credibility he had with the eurozone leaders and threw the banking system into chaos.

Insights.abnamro.nl/en

Bloomberg: ABNM

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Euro Corporate Watch –

AGreekment is no done deal

The deal that was on the table prior to the referendum was

eurogroup and the IMF have expressed serious concerns

less draconian than the current agreement. The referendum

regarding the sustainability of the Greek debt level.

also set the Greek population on the wrong footing. They expected a better deal, not worse. On top of very harsh

Risk of near-term Grexit reduced but remains looming in

economic measures and reforms, Greece now also has to turn

the long run

over part of its sovereignty to Europe. Indeed, it remains to be

We think that the ‘AGreekment’ has reduced the risk of a near-

seen if Mr Tsipras can obtain a majority in Parliament for this

term Grexit but the risks remains significant. Greece has made

agreement.

all the concessions by accepting very tough measures. But, let’s not forget that this is only a list of minimum requirements

But even if Mr Tsipras will find a majority for now ,

to start the actual negotiations for a third rescue package. The

implementation will still be extremely difficult. The Syriza

real number crunching still needs to be done (on financing

administration has led the Greek economy into a recession.

needs, debt sustainability and bridge financing). Today the

The recent bank holidays and financial chaos has added to the

latter will be discussed in the eurogroup meeting. Greece

precarious situation. The biggest risk therefore is the

needs EUR 7bn by 20 July and another EUR 5bn by mid-

implementation of the measures in the coming days, weeks

August.

and months against the background of a deepening recession that will certainly erode the willingness for implementation.

Initial market reaction was relief but concerns are growing After Friday’s rally, equity markets rallied another 1 to 1.5% on

Green light national parliaments also needed

the ‘AGreekment’ announcement this morning. Fixed income

Another hurdle on the way are the national parliaments of

investors made the same assessment this morning and initially

some eurozone members, and the German Parliament in

the 10-year bund yield briefly touched 0.98% before reversing.

particular. There was already quite some resistance against

Credit spreads tightened a couple of basis points but on very

the second rescue package, including members of Merkel’s

light flows.

own political party. This time, the stakes are higher and the resistance against a potential third rescue package will only

Overall, this ‘AGreekment’ marks a big U-turn of the Greek

have grown.

administration but the implementation risks are high. This agreement is certainly not a panacea for Greece and the

Target privatisation fund seems unrealistic

eurzone. The first test is Wednesday when the Greek

We also have strong doubts for the target amount of EUR

Parliament needs to approve the first set of measures. Our

50bn for the privatisation fund. This seems rather unrealistic,

feeling is that this morning’s optimism will ebb away and will

also when bearing in mind that the previous proceeds of the

slowly be replaced by scepticism and concerns.

privatisation plans in the previous agreement fell well short of expectations. If that happens the debt sustainability projections will not be met.

No haircuts, but debt relief could be a possibility The document further states that the eurogroup ‘stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level.’

However, debt relief will only be taken into consideration if the measures agreed upon in a third ESM programme will be fully implemented. Haircuts are out of the question although the

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Euro Corporate Watch –

AGreekment is no done deal

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