Europe stocks cautious on Greek deal but Dow gains

LONDON—European markets reacted cautiously yesterday to the news that Greece finally secured its second massive bailout, but Wall Street was more upbeat, with the Dow trading above 13,000 points for the first time since May 2008. The hope in Europe’s capitals is that the Greek deal will give the country time to enact economic reforms and get back on the path to growth.

But many hurdles remain and the country is lumbered with massive debt even after its private creditors agreed to a huge writedown on their bondholdings. The view in the markets is that Greece remains insolvent and that its debt crisis still has a few more chapters to run. “This deal clearly does not solve Greece’s problems or that of the rest of the eurozone. What it does do is buy some time,” said Louise Cooper, markets analyst at BGC Partners.

“This deal does not rule out a breakup of the eurozone. It does not rule out a Greek default in the future, it does not prevent contagion and does not help the wider eurozone indebtedness problem.” With the deal agreed, European investors took profits on the gains accumulated over recent days. The FTSE 100 index of leading British shares closed 0.3 per cent lower at 5,928.20 while the CAC-40 in France fell 0.2 per cent to 3,465.24. Germany’s DAX ended 0.6 per cent lower at 3,898.

The euro was faring slightly better, trading 0.2 per cent higher on the day at US$1.3265. The mood on Wall Street was more optimistic, with the Dow Jones industrial average rising 0.4 per cent to 13,002.12, trading past the psychologically important barrier of 13,000 for the first time since the global financial crisis entered its most critical phase in the spring of 2008. The broader Standard & Poor’s 500 index was up 0.5 per cent at 1,367.48.

US markets have risen strongly this year on hopes that the economic recovery is gaining pace and Europe is slowing getting a grip on its debt troubles. After 12 hours of wrangling in Brussels, Greece’s partners in the 17-country eurozone agreed to hand over another €130 billion (US$170 billion) to the country in the hope it will avoid a potentially disastrous default as soon as next month, and secure the euro currency’s future.

On top of the new rescue loans, Athens will also ask banks and other investment funds to forgive it some €107 billion (US$142 billion) in debt, while the European Central Bank and national central banks in the eurozone will forgo profits on their holdings. However, the pieces of the jigsaw have yet to be put in place and many in the markets think there will be more high-wire acts in the Greek debt drama.

Perhaps most important of all will be Greek elections, due in April, at a time when the country’s economy is in freefall and unemployment is standing at a record rate above 20 per cent. With the parties of the governing coalition struggling to get a combined 30 per centin opinion polls, there are fears that anti-bailout forces may win the election, or at least hold the balance of power.

“Greece now faces an austerity programme that, in the absence of a freely floating currency or the ability to ease monetary policy aggressively, will not only very likely exacerbate an already severe recession but may very well still leave it requiring an additional bailout in the years ahead,” said Simon Derrick, an analyst at Bank of New York Mellon.

“This point will no doubt not be lost on politicians from New Democracy and PASOK as they watch their ratings slump and voters turn to the anti-bailout leftist parties ahead of the April election,” Derrick added. Over recent days, stocks have rallied in the hope that a deal would be secured and that Greece would avoid defaulting on its debts in a disorderly fashion that could hobble a tentative improvement in the global economy.

AP