See original article at http://www.cnbc.com/id/46461291
The second Greek bailout deal was finally clinched in the early hours of Tuesday morning.
European markets and the euro were initially expected to rally after the market open – but a troika report leaked to the Financial Times could exacerbate fears in the market that Greece may not be able to hit its bailout targets and drive markets down again.
“Short term you’re still in the vagaries of what politicians do day-to-day. This is still a sentiment-driven market,” Ian Harnett, European Strategist, Absolute Strategy Research, told CNBC. “The big message has got to be that the European governments want to keep the euro together and that will lead to a weaker euro.”
A weaker euro could help countries in the single currency bloc in the medium term.
“The key for us is fundamental monetary policy. The exchange rate has to do the work,” Harnett said.
The euro is expected to move upwards on the news in the short term. “A break of 1.3350 in EUR/USD looks necessary to trigger the next round of stops, which could then see a move into the high 1.30s,” currency strategists at Lloyds wrote in a research note.
The lack of the opportunity for devaluation, which was used to help solve the Asian crisis of late 1990s, will limit opportunities for growth, Jonathan Tepper, Partner at Variant Perception, told CNBC.
The “internal devaluation” provided by austerity measures such as wage cuts will not provide the necessary medicine, he believes. While Latvia and Ireland have achieved some relative success using these methods, he argues that their rising emigration levels shows that they have not been entirely successful.
“The idea that somehow Greece and Portugal will be able to restore competitiveness or that the imbalances between the core and periphery will be able to solve themselves is slightly ridiculous,” he said.
Concerns about the other peripheral economies still remain, and bond yields are set to rise again, Harnett believes, as “governments will have to pay for this in some way.” Rising bond yields led to Portugal, Ireland and Greece seeking bailouts earlier in the crisis.
“Portugal is next in line. You don’t need to have anything more than fourth grade math to understand that the wedge becomes further out when you’re borrowing at 14 percent and you’re contracting,” said Tepper.
“Greece will have to restructure their debt, Portugal will have to, Ireland will if they’re smart.”
And Greece’s own problems are far from solved. Large-scale privatizations of state-backed assets still haven’t begun.
“The best-case scenario for Greece put forward is still a 120 percent debt to GDP (gross domestic product) ratio. Clearly getting the private sector involved will get Greece an enormous debt burden that it can’t service,” he said.
Its economic problems include soaring unemployment, a current account deficit of around 10 percent and exports which are still not at pre-crisis levels.
“Greece still doesn’t have a proper growth model, and that’s really the main source of worry,” Guntram Wolff, Deputy Director, Bruegel, told CNBC.