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Greek debt deal lifts Europe but gains are capped

Article By: ,  Senior Market Analyst
November 27, 2012 11:11 AM

Eurozone ministers and the IMF finally came to an agreement and hammered together a deal last night in order to release the funds Greece so desperately requires in order to stay solvent, lifting equity markets as a result on Tuesday. The lenders agreed on a package of measures to reduce Greece’s debt by 40 billion Euros to a more sustainable level of 124% by 2020 and taking it a step further by reducing it below 110% by 2022.

Measures included cutting the interest rate on official loans and extending their maturity by 15 years. Further measures surrounding the reduction of debt will need to be considered again in 2016, however at least this meeting has bought the indebted nation plenty of time. 43.7 billion Euros will now be released in stages as Greece fulfils the conditions.

The markets were fairly confident that at some point this week a deal would be struck whilst the expectation was also that a slightly more watered down deal than the original proposal would be reached and so therefore we have not really seen any great surprises. Additionally it is the short term fix as expected, averting the likelihood of a Greek default but Greece has not been removed from investors headlights in the long term. The outlook for Europe still remains weak and this deal does not dramatically reverse the situation in the single currency region.

That said markets are tracking higher before turning their focus to the impending deadline of the US Fiscal cliff which is fast approaching. For this reason any potential upside may be capped despite the vigour for investors to enjoy a santa rally.

In early trading the FTSE had gained 0.4%, the DAX 0.5% and the CAC 0.2%.

Here in the UK banking and mining stocks are back in favour as risk appetite increased, at least for the short term, following the news of the Greek bailout agreement last night. Royal Bank of Scotland was the biggest gainer, up over 3.7% in early trading after UBS lifted their recommendation to buy from neutral. Sector peers Lloyds and HSBC were also trading higher this morning. Mining stocks also made advances, tracking metal prices upwards.

Looking towards economic data, the latest revision of the UK Q3 GDP figure remained unchanged at 1%, however the year on year figure dropped to -0.1%. It is becoming increasingly clear that activity in the Q4 has relapsed now that the Olympic boost has started to fade, with a contraction looking more than likely as consumers struggle with the increase of inflation and headwinds from the euro area.

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