What the Greek deal does and does not do - BBH

Research Team at BBH, suggests that for investors, the most important thing about the successful review of Greece's implementation of last year's agreement is that it effectively removes it from the list of potential disruptive factors in the coming quarters.

Key Quotes

“Assuming Greece resolves a few outstanding issues in the next few days, it will be given roughly 7.5 bln euros next month and another three bln euros over the summer.

With Greece passing its first review, the ECB can decide as early as the June 2 meeting to once again accept Greek government bonds as collateral. This could save Greek banks as much as 500 mln euros a year in interest servicing costs. If the ECB refrains from doing so, it risks disappointing investors.

The second decision that ECB faces regards including Greek bonds in its asset purchase operation. The ECB could waive its own rules to include Greek bonds. However, this seems considerably less likely than accepting Greek bonds as collateral. Putting more Greek bonds on the ECB's balance sheet seems like a bigger commitment than accepting them as collateral on loans.

The price that Draghi may have to pay for his unorthodox policies is more orthodoxy in other areas. It is not clear that Greece's debt is sustainable.

The IMF made what some would see as a strategic retreat. It chose to capitulate now and fight later.

However, the IMF has not ponied up more funds. It will conduct a new debt sustainability analysis, incorporating today's agreement, before the end of the year. It will likely be after the second review of Greece's progress in the fall, which could free up another two bln euros in funds if Greece continues to implement last year's agreement.

Moody's responded almost immediately to the deal. Seemingly ironically it suggested that borrowing more money (or getting access to funds that were already earmarked for it) was positive of Greece's creditworthiness. Of course, the risk of a liquidity squeeze was alleviated, but that says nothing about its solvency.

We caution investors against concluding that the agreement clears the way to buy Greek assets. Investors have been anticipating something like what has materialized. Consider that the Athens Stock Exchange has rallied nearly 54% since the mid-February lows. After pushing higher earlier, the market reversed and closed more than 1% lower. Today's loss was led by the financial sector, which dropped 3%.”