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Greece Accedes To EU Requirements (For Now)

Greece and the EU have reached an accommodation on the bailout program. Greece has agreed to leave the key aspects of the program in place, but will present the points upon which it plans to negotiate new terms to the EU finance ministers today. Greek stocks and especially Greek bank stocks have rebounded sharply, but still remain below levels that existed before PM Antonis Samaras called for the snap election in early December.

Although there has been significant volatility in trading, the trend in Greek stocks has been up since the election results were announced in late January. I would be surprised if the rebound continues without clearer evidence that a permanent deal will be reached. EU finance ministers would be wise to show some flexibility in renegotiating certain aspects of the agreement. The Greek government, on the other hand, will probably take a tougher stance on those changes that it feels are necessary (and upon which it campaigned). It is possible that a final deal will be reached, but it probably will take some time and the financial markets may hesitate in bidding Greek share prices up, as long as that uncertainty still exists.

The financial markets will also have to get over what almost certainly will be a setback for the Greek economy in the 2015 first quarter, due to the acrimonious exchange between Greek and EU government officials on the bailout extension. We know that many Greeks pulled their money out of their banks over the past couple of months. Many businesses also put their sales, marketing and investment plans on hold. This could result in another round of finger pointing, but the Greek government will still use the Q1 results to argue that austerity is impeding the recovery in Greece's economy.

Personally, I think that mistakes have been made on both sides. The new Greek government should have struck a more accommodating tone at the outset to get the time it needs to structure and negotiate a comprehensive plan for reform that differs from the current regime. Similarly, the EU finance ministers should not be pushing for Greece to propose its reforms immediately. (According to press reports, the Greek government's list of proposed reforms is due today.) it would have been better, in my mind, to freeze the current program in place and give the Greek government six months to develop an alternate plan.

Disclosure: The author is long NBG.