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    GSAM Connect 
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    July 13, 2015

    GSAM Connect | July 13, 2015

    Greece, Eurozone Leaders Reach a Deal

    Eurozone leaders and Greece hammered out an agreement Monday morning contingent on the Greeks implementing a fresh round of austerity measures. Here are the details and potential market implications from the deal. 

    What Happened?

    • Greece is set to receive up to €86 billion ($96 billion) in new bailout loans to help pay off debt and recapitalize its banking system.
    • Importantly, the deal is dependent on Greek Prime Minister Alexis Tsipras implementing additional budget cuts, pension overhauls, and sales tax increases by Wednesday (July 15), which we believe might be a tough sell in Athens.
    • While a preliminary pact is in place, there are still hurdles to reaching a full agreement. We believe Greece will pass the necessary legislation by July 15, although such a deal will require support from opposition parties.
    • Gaining support for a deal could split Syriza and its right-wing coalition partner, the Independent Greeks party, potentially leading to new elections and a reformulation of the government in the coming days.
    • Additionally, a number of countries require parliamentary approval of the agreement. For instance, we believe Germany will support the deal, but Finland may be in question. However, even without a unanimous vote, the deal can still be approved.

    Assuming austerity measures are implemented, Eurozone governments will aim to make Greece’s debt more manageable. Greece could be given additional time to repay its loans, with specific details to be negotiated at a later date.

    While markets may continue to be volatile1 in the coming days, we still do not expect a repeat of the systemic and existential threats to the Euro area as a whole that emerged back in 2011-12. The European Central Bank (ECB)’s quantitative easing program has also been supportive of European markets. We believe the ECB may ease further if markets become more volatile.

    Since the latest news, markets reacted favorably to the deal. Many European equity markets rallied by more than 1% on Monday. The Euro fell by 1.4% to $1.10 against the US Dollar. In the US, the S&P 500 gained more than 1%.

    GSAM Market Perspective

    If austerity measures are agreed upon by the relevant parties, we believe European equities may be well-positioned to benefit from the reduction in risks surrounding Greece. We believe European equities hold a favorable backdrop given:

    1. Quantitative easing (improving liquidity that also puts pressure on the Euro).
    2. A potentially recapitalized banking system.
    3. Recent improvement in corporate earnings.

    In fixed income, we believe peripheral Eurozone markets2 may have room to rally on the reduced risk of a Greek exit from the Eurozone. We believe core European rates look attractive compared to US rates.

    Volatility may start to decline now that a deal with Greece is underway. Low supply over the summer months may help support European markets. By contrast, we anticipate US rates should rise on improving economic growth and potential Federal Reserve policy tightening later this year.

    Topics: Risk Premium, ECB, Risk Management

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