Greece's breakthrough” agreement with European creditors is another “extend and pretend” deal that does not address the country’s underlying problems, analysts have warned.

Eurozone leaders reached an agreement in the early hours of yesterday  morning to unlock €10.3bn (£7.8bn) in fresh loans, €7.5bn of which will be disbursed by next month to cover debt servicing needs and clear arrears.

After 11 hours of talks and “a few tense moments”, Euclid Tsakalotos, the Greek finance minister, welcomed a tacit commitment by the country’s creditors to significantly reduce Greece’s debt burden.

Jeroen Dijsselbloem, the head of the Eurogroup, hailed the deal as an “important moment” for Athens.

The “breakthrough” also paved the way for the International Monetary Fund (IMF) to participate in Greece’s third bail-out, he said.

“This is an important moment in the long Greek programme, an important moment for all of us, since last summer when we had a major crisis of confidence between us.”

Greek bond yields fell and stock markets rose yesterday morning after the deal was announced.
"This can be the beginning of turning Greece's vicious circle of recession, measures, recession, into one where investors have a clear runway to invest in Greece"Euclid Tsakalotos

Yields on benchmark 10-year debt fell below 7pc for the first time since last November, while yields on two-year government bonds dropped by as much as 150 basis points – or 1.5 percentage points, to 6.6148pc.

The deal means the European Central Bank could reinstate a waiver on Greek bonds as collateral, resulting in cheaper funding for the country’s banks. Lenders have been forced to use emergency funds from Greece’s central bank since February 2015.
Greek two year bond yieldsGreek bond yields dropped dramatically after the deal wasannouncedS

Debt relief compromises

Analysts at Societe Generale said the IMF’s decision to back down on demands for “upfront” and “unconditional” debt relief for Greece meant the country remained on “a clear path to disorderly default”.

The IMF accepted that debt relief measures would not be in place until 2018, when Greece’s current rescue package ends.

“The measures proposed by the Eurogroup look vague, are not upfront, and are clearly not large enough to lead to a definite resolution of Greece’s debt problems,” said Yvan Mamalet, an economist at Societe Generale.

“This agreement allows the euro area leaders to continue to play the extend-and pretend game – all the more so as the IMF said future involvement may be considered “at a later date”.

Analysts at Citi said the deal meant Greece would avoid a crisis similar to that of summer 2015, but many questions remained unanswered.

“It leaves Greece’s return to market funding uncertain and probably delays the inclusion of Greek bonds into the ECB’s QE until public debt is deemed sustainable by ECB and EU,” they said in a note.

Poul Thomsen, the IMF’s European director, described the issue of debt relief as “sensitive” for “all sides” saying the fund had made “major concessions” to reach a deal.

“We welcome that it is now recognised by all stakeholders that Greek debt is unsustainable,” he said. In a stark analysis released on the eve of the Brussels meeting, the IMF warned that Greek public debt would soar to 250pc of gross domestic product (GDP) unless creditors took drastic steps to ease the burden.

Mr Thomsen said IMF staff would recommend its participation in the Greek programme to its board “before the end of the year”, provided a new analysis of “measures on the table will deliver the necessary debt relief”.