Greek Deal Done: Will Tsipiras Lose His Job?

"22 hours and all I got was this lousy deal!" That's the tee shirt that Greek Prime Minister Alexis Tsipiras will likely have to wear, when he heads back to Greece and tries to convince the Greek Parliament to approve a three-year, €82-86 billion bailout deal ($91 billion to $96 billion). While the 22-hour marathon negotiation allows Greece to remain in the common currency zone, it does so at a steep price. Price tag = €82-86 billion: The first thing to note about the deal is that it is larger than the €53.5 billion the Greeks had requested and the reason is clear: In the past month, while Tsipiras was messing around with trips to Russia and a snap referendum, the Greek economy ground to a halt, further crippling commerce. The upshot is the Europeans believed that the Greece asked for too little in its third bailout request.

Austerity: Greece will immediately implement tax increases, tough pension reforms and privatization of certain industries, like energy transmission. Additionally, Greece agreed to changes in labor laws and administrative overhauls.

New €50 Independent Fund: Greece will transfer €50B of state-owned assets into a fund, which will be sold off or wound down to help pay down the country’s debt over the coming years. Because there is no trust in the Greeks, the Europeans will supervise the fund.

U-Turn on Greek Legislation: When Tsipiras came into office at the beginning of the year, he enacted legislation that tried to ease up on austerity, including rehiring of some laid off public employees. The new bailout requires that Greece undo those measures.

IMF IN: Greece asked for the IMF to be excluded from a deal, but the Europeans liked the concept of an adult in the room, so the IMF will continue to monitor the Greek’s adherence to its bailout commitments.

Greek Banks: The Europeans will earmark €10 - 25 billion to recapitalize the banking system, though it is unclear when the banks will be able to reopen.

Re-Profiling debt: Europe will not write down Greece's existing debt, but will consider "re-profiling" it, which essentially means that after Greece passes its first review, the Euro group might potentially elongate the terms and reduce the interest rates applied to various loans.

Deadline: The Europeans said that the Greek Parliament has until Wednesday to approve the deal, which could mean that Tsipiras will have to cozy up to become "frenemies" with some right wing legislators.

Tsipiras Out?: The parliamentary process could  trigger fresh elections and Mr. Tsipiras could find himself not only as the architect of a lousy deal, but an unemployed one as well.

BOTTOM LINE: Although the Europeans may have won the battle, they will likely lose the war. Yes, Greece will remain in the Euro zone, but the deal just kicks the can down the road. Without a significant write-down of the now more than $350 billion in debt, the Europeans are unlikely to see total repayment and Greece may ultimately have to leave the Euro zone. For the Greek citizens, this lousy deal will amount to even more suffering.

Greece, Jeb! and Stock Corrections

European leaders will convene yet another emergency meeting in Brussels on Monday to discuss how and whether to restructure Greece’s debt. This may all sound like déjà vu all over again, but contrary to five years ago when the Greek drama started to unfold, today investors are less concerned that a default would take down the euro zone or the interconnected global economy. It could however, create a bout of panic in the markets. If officials do not come to an agreement, they will have no choice but to come up with a Plan B, which would likely include capital controls to limit withdrawals from Greek banks and prevent a classic run on the banks (see “It’s a Wonderful Life” for the best explanation of a bank run). In fact, about €5 billion of deposits reportedly left Greek banks last week alone. Instead of a well-orchestrated Grexit, there could be what the FT’s John Authers calls a “Graccident”, where a default would lead to a messy and de facto Grexit. Plan B would also likely include the European Central Bank’s extension of emergency loans to Greek financial institutions and Greece’s preparation of a new currency or IOU system.

As the tragedy that is Greece continues, investors seem more interested in the Federal Reserve. Last week, Chair Janet Yellen elegantly threaded the needle: Yes, the central bank would most likely raise short-term interest rates this year (probably two quarter of a percent increments), but the pace of increases will be gradual. Complicating matters for the central bankers was the first quarter, when the economy contracted by 0.7 percent. Sure, most of the slowdown was due to transitory factors, like weather, the West Coast port shutdown and $40 crude oil, but far be it for this Fed to err on the side of snuffing out potential growth.

The government will provide a third update to Q1 GDP this week, which may show marginal improvement, but most have already set their sights on the rest of the year, which should improve steadily. Because Q1 was such a stinker, growth for the total year is likely to be 2.5 percent, matching the pace of the past few years.

I usually quote the post World War II rate of growth, which is about 3.3 percent, as a benchmark, but according to the New York Times that longer term average may overstate the expected growth rate today. The reason is that “Over the last 40 years, the American economy has grown at an average of 2.8 percent per year,” which is considerably slower than the 3.7 percent average from 1948 to 1975. Additionally, the higher rate includes “two favorable trends that are now over: women entering the work force, and baby boomers reaching their prime earning years.”

The downshift in growth expectations might come as a surprise to newly minted presidential candidate Jeb Bush, who in a speech last week said that his goal for economic growth was 4 percent. The Financial Times called this figure “Fantasyland” and the NYT chimed in, saying Mr. Bush’s 4 percent goal has “close to 0 Percent Chance” at success.

MARKETS: While the NASDAQ and Russell 2000 indexes were making new highs last week, two other indexes weren’t so fortunate. The Dow Jones Transportation Average entered correction territory (a drop of more than 10 percent) for the first time in nearly four years and the Shanghai Composite lost 13.3 percent for the week, the worst week since the financial crisis and the second time this year it has fallen into correction territory. Additionally, last week brought the biggest outflows from bond funds in two years, triggered by the possibility of not one, but two, interest rate hikes later this year. These events were just more fodder for those worried investors who are convinced that the next leg for the broad U.S. market is down.

• DJIA: 18,015, up 0.7% on week, up 1.1% YTD
• S&P 500: 2110, up 0.8% on week, up 2.5% YTD
• NASDAQ: 5,117 up 1.3% on week, up 8% YTD
• Russell 2000: 1284, up 1.6% on week, up 6.6% YTD
• 10-Year Treasury yield: 2.27% (from 2.39% a week ago)
• August Crude: $59.61, down 0.6% on week
• August Gold: $1201.90, up 1.9% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.80 (from $2.80 wk ago, $3.68 a year ago)

THE WEEK AHEAD:

Mon 6/22:

8:30 Chicago Fed

10:00 Existing Home Sales

Tues 6/23:

8:30 Durable Goods Orders

9:00 FHFA Home Price Index

10:00 New Home Sales

Weds 6/24:

8:30 Q1 GDP – final reading (prev = -0.7%)

Thurs 6/25:

8:30 Personal Income & Spending

Fri 6/26:

10:00 Consumer Sentiment