OREANDA-NEWS. Today's agreement between Greece and other eurozone states may ease the former's extreme liquidity pressure and raises the possibility of a third bail-out programme, but substantial near-term and long-term challenges to the sovereign's creditworthiness remain, Fitch Ratings says.

The agreement follows last week's Greek request for a three-year European Stability Mechanism (ESM) loan facility and intensive negotiations. The Greek government has been asked to submit the overall agreement and legislation on some of its key provisions for parliamentary approval by Wednesday. This would be followed by national parliamentary approvals where needed, and the start of ESM programme negotiations, potentially beginning next weekend. Greece's official sector creditors estimate possible programme financing needs of EUR82bn-86bn, although the agreement suggests they should "explore the possibilities to reduce the financing envelope."

Breaking the political impasse could temporarily support sovereign liquidity if it unlocks bridge financing. Donald Tusk, President of the European Council, said finance ministers will "as a matter of urgency discuss how to help Greece meet her financial needs in the short term."

But political and implementation risks to the deal and any subsequent ESM programme remain high. Parliamentary backing for an agreement that achieves very few of the Greek negotiators' earlier demands could be secured with centrist support. But the Syriza-led coalition may lose its working majority, effectively resulting in something akin to a national unity government and increasing the likelihood of another election this year.

The Greek government's acceptance of many of its creditors' terms suggests it could secure an ESM programme, but today's deal leaves scope for disagreement. For example, fiscal surplus targets are not specified, although they have been part of previous proposals.

Even if an ESM programme were established, there would be a high risk that it goes off track quickly. Today's deal says that "ownership by the Greek authorities is key" but this may not be forthcoming if the strong policy conditionality is perceived to have been forced on the government. The economic damage inflicted by the closure of Greek banks will make meeting programme targets more difficult. The deal provides for strong monitoring and oversight by Greece's creditors, but this has not kept the country's previous bailouts on track.

Aiming for EUR50bn from a scaled-up privatisation programme after state assets are transferred to an independent fund appears ambitious, although the new mechanism may be more effective than previous efforts (details of how the fund will operate are not set out).

Estimated recapitalisation needs of up to EUR25bn would be consistent with a scenario where non-performing exposures are formally classified as non-performing loans (NPLs), coverage is kept around 60%, and capital ratios are strengthened by around 4pp to cover potential future losses. At end-1Q15 the four largest Greek banks reported an additional EUR26.6bn of non-performing exposures using the European Banking Authority's wider definition that were not yet classified as NPLs.

The insistence on prompt implementation of the Bank Recovery and Resolution Directive suggests recapitalisation is likely to be accompanied by a resolution action that at a minimum will wipe out the banks' equity and remaining subordinated debt. Recapitalisation of the Greek banks by the ESM would be likely to require bail-in of 8% of liabilities and own funds. The equity/assets ratios (including preference shares) of the four largest banks were 8%-10% at end-1Q15, so this would write off most of the banks' reported equity at that date. Losses since then are likely to have reduced this figure.

We believe the intention to make EUR10bn available in a segregated ESM account for potential bank recapitalisation needs and resolution costs, ahead of a comprehensive assessment by the ECB and the Single Supervisory Mechanism after the summer, is intended to facilitate continued access to ECB and Emergency Liquidity Assistance (ELA) funds. An ECB spokesman said the central bank had maintained its EUR89bn ELA cap on Monday. But capital controls in some form are likely to remain for some time.