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Early Signs Show Positive Reaction to Greek Deal

Governments across the euro area Friday praised a deal reached by European leaders to give Greece more time to deal with its mountain of debt. That sentiment was echoed cautiously by investors even though one rating agency declared the country would be temporarily in default.

Greece
Jorg Greuel | Getty Images
Greece

Financial markets gave the deal a positive reception, with bank stocks in particular benefiting. Greek, Irish and Spanish bonds continued to rally.

One rating agency, Fitch said that it would place the Greek sovereign rating into “restricted default” and assign a “default” rating to the affected Greek government bonds when the new offer for exchanging maturing bonds for ones with longer terms closes. It will then assign new post-default ratings to Greece, which are likely be “low speculative-grade,” after the new securities are issued.

But David Riley, head of sovereign ratings for Fitch, also struck an upbeat tone and said the commitments made by euro area leaders “represent an important and positive step towards securing financial stability in the euro zone.”

Mr. Riley added that “the reduction in interest rates and extension of maturities potentially offers Greece a window of opportunity to regain solvency, despite the formidable challenges that it faces.”

The International Swaps & Derivatives Association also said the Greek rescue plan should not trigger credit-default swaps, a form of debt insurance, on the nation because it would be “voluntary.”

The Greek finance minister Evangelos Venizelos said the agreement hammered out in Brussels on Thursday represented “a strong unified European front protecting Greece” and “an umbrella of protection for Greek banks” as well.

“This is a great relief for the Greek economy, which will gradually pass on to the real economy, but it should not, under any circumstances, lead to a relaxing of our efforts,” Mr. Venizelos said at a news conference in Athens.

“We must remain focused on meeting fiscal targets and curbing spending,” he added. Austerity and other economic measures voted through the Greek Parliament last month must be implemented, he said, and more intensive efforts would be made to crack down on widespread tax evasion.

In a speech broadcast live on television, the Prime Minister George A. Papandreou thanked Greeks for their “patience, persistence and self-sacrifice.”

“We reached the edge of the abyss but we didn’t give up, we fought as we have done at every critical moment in Greece’s history, and we rose to the occasion,” he said, adding, “we still have lots of work to do.”

The government’s relief was not reflected in the Greek press, with most headlines on Friday striking a skeptical, if not hostile, tone. Kathimerini, a leading center-right daily, acknowledged in its editorial that the Brussels pact had “given Greece some breathing space” but expressed doubts about whether the country’s leaders were capable of making tough changes.

“The question is can our politicians rise to the challenge and carry out the commitments Greece has agreed to with its international creditors? The signs are not good.”

Indeed, resistance to reforms was clear on Friday. Greek taxi drivers entered their fifth straight day of protests, blocking major road junctions to protest the government’s plans to open their sector to competition.

Greek sailors, who had threatened to compound the travel chaos by closing the country’s ports, retracted their threat of strike action Friday after government officials indicated that a law proposing reductions to pensions might be temporarily frozen.

The package of measures approved by euro zone leaders includes a reduction in interest rates for the two other bailed-out countries as well — Ireland and Portugal — where sighs of relief were also heard. Dublin, in particular was not forced to yield and raise its low corporate tax rate of 12.5 percent, a pledge that some other euro-area countries had been seeking.

“Ireland’s burden has been eased,” the Irish Prime Minister Enda Kenny said after the meeting. “We have a long way to go, we still have a massive budget deficit to bridge. But for now this was a good day for Ireland," Mr. Kenny was quoted as saying by Irish media.

Pedro Passos Coelho, the Portuguese prime minister, expressed optimism that the deal would remove concerns among investors and credit agencies about the government’s ability to implement a tough austerity program in return for the bailout agreed earlier this year.

“The more favorable conditions obtained by Greece will also be applied to Portugal and that is important,” he said.

In Spain, Alfredo Pérez Rubalcaba, the Socialist candidate who is hoping to replace outgoing prime minister José Luis Rodríguez Zapatero after the next general election, told a Spanish radio station that the deal had “definitively resolved the Greek topic” and had “placed a wall” between Greece and other weakened euro countries.

Asked whether Spain had been on the verge of requiring a bailout, Mr Rubalcaba said that the country had been “in a very difficult situation last week,” when its borrowing costs soared.

Elena Salgado, the Spanish finance minister, called the deal “a very strong and thick wall” against contagion. She also welcomed the E.U.’s determination to reduce the influence of credit rating agencies.

“They have received a little warning,” Ms Salgado told Ser, another Spanish radio station. The message to the credit rating agencies, she added, was that “we will no longer consider your opinion as the only opinion that should be taken into account.

In its remarks, Fitch described the summit as “a more unified and coherent policy response to the Greek crisis,” and said “broader financial instability across the euro zone eases near-term pressure on sovereign credit profiles and ratings across the region.”

The Euro Stoxx 50 index of blue chips opened strongly but gave up some of its gains by late afternoon. The Dow Jones industrial average opened slightly lower, pulled down, analysts said, by weak earnings from Caterpillar.

The euro rose against a number of currencies including the Swiss franc and the pound, but was slightly weaker against the dollar at $1.4368. Analysts said a report showing German business confidence declined by more than forecast in July was holding back stronger gains.

Greek 10-year yields dropped 137 basis points to 15.12 percent, while the yield on 10-year Portuguese debt fell 69 basis points to 10.93 percent and 10- year Irish yields declined 51 basis points to 11.84 percent. Yields on Spanish and Italian debt also fell.

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