Should Markets Be Cheering the Greek Debt Deal?

Hours after euro zone finance ministers and the International Monetary Fund (IMF) arrived at a much-awaited deal to help Greece reduce its debt, sending risk assets higher, market experts began expressing doubt over whether this deal will be successful in resolving the nation's long-term debt troubles.

Should Markets Be Cheering the Greek Debt Deal?
Aris Messinis

"All you have got is a framework to pretend the numbers are going to add up in eight year's time, when it seems to be fairly obvious that they are not. Greece has an overwhelming debt burden, and it's hard to imagine the sort of growth that can deal with that, and get the (debt) numbers to anything acceptable within a reasonable space of time," said Richard Jerram, chief economist of Bank of Singapore.

Risk assets including the euro and emerging market stocks rose after the announcement, with the single currency spiking above the $1.30 level in early trade. While the euro has since pared back some of its gains, Asian markets are still trading broadly higher.

Greece's international lenders agreed late Monday to reduce the country's debt by 40 billion euros ($51.9 billion), cutting it to 124 percent of gross domestic product (GDP) by 2020 by lowering interest rates charged on loans made to Greece and to return profits made on Greek bonds by the European Central Bank back to Athens. The new deficit target is also less ambitious than IMF's original goal of 120 percent.

The currency bloc's finance ministers also gave the go ahead to release 43.7 billion euros in loans to Greece starting in December, with further payments during the first three months of 2013, on condition the government implements agreed reforms outlined under the bailout plan. This aid is expected to fill the country's financing gap till the end of 2014, according to analysts.

Vasu Menon, vice president, Wealth Management Singapore at OCBC Bank, said while the "broad strokes" painted by European policymakers are very positive, the "devil is in the detail."

"We've seen Greece run into a lot of problems in terms of implementation, it is one thing to provide broad numbers, but how they are going to achieve it eventually, is going to be a tough road ahead," he said.

(Read more: Debt Reduction Alone Will Not Help Greece: Dallara)

Menon said eventually there needs to be some form of debt forgiveness on the part of creditors, noting that even if debt-to-GDP falls to 124 percent, it is still extremely high.

Over 70 percent of Greece's debts are now owed to official lenders such as the European Central Bank and International Monetary Fund. Private-sector bondholders, represented by the Institute of International Finance (IIF), agreed to write off some of Greece's debt earlier in the year, but Germany has so far resisted calls for further debt relief for Greece.

"At the end of the day, the creditors will have to come to terms with the fact that this nation is a bankrupt nation, and you'll have to forgive a substantial amount of debt to help it to recover. Austerity alone is not going to be a solution to the problem," he said.

Why Are Markets Still Up?

Despite doubts surrounding the new debt deal, risk appetite remained in the markets. Stock indexes in the region, including South Korea's KOSPI and Australia's ASX-200 nded up close to 1 percent.

"You might not resolve everything today for Greece, but certainly if the intent is there, that's enough for the markets for now," said Laura Fitzsimmons, vice president, Futures & Options, JPMorgan Investment Bank.

The key point, according to Mark Matthews, head of research Asia at Bank Julius Baer is that the IMF has breached its "red line" of 120 percent of GDP, suggesting it is a little more flexible, and reducing "the threat of brinkmanship" for markets.

Jerram of Bank of Singapore, however, remain unconvinced, adding, "The markets are pleased because the prospect of some immediate crisis has been postponed to next year, or the year after, or however long it is until they run out of money again. But I don't think anything really has been solved."

By CNBC's Ansuya Harjani