Finally, a deal! Tail risk of a disorderly Greek default dissipates.

European leaders have finally delivered what looks like a comprehensive plan to manage its sovereign debt problems from spreading to bigger economies such as Italy and Spain and to avert a possibly ruinous banking crisis.

After what seemed like days and hours of deadlock and brinkmanship at the EU ministerial summit, significant progress has been made on three key areas, even if key details are lacking.

On the Greek situation, officials have managed to persuade bondholders, especially banks, to take 50% losses on their holdings of Greek government bonds.

This paves the way for European banks to recapitalise their dented balance sheets to an agreed target of 9% in Tier 1 capital ratio by 30-Jun-2012. The European Banking Authority estimated banks’ capital needs at EUR 106 billion, with Spanish banks requiring EUR 26.2 billion and Italian banks EUR 14.8 billion. It gave them until 25-Dec to submit money-raising plans to national supervisors. Banks that fail to raise enough capital on the markets will first tap national governments, falling back on the EFSF rescue fund only as a last resort.

Finally, they have also agreed to expand the firepower of the euro zone's bailout vehicle, known as the European Financial Stability Facility (EFSF), by four- or five-fold suggesting it could provide guarantees for around EUR 1 trillion. Details are still sketchy but turning this fund into a bank with a credit line from the ECB has been squarely rejected by the Germans. It is likely that the EFSF will be used to insure bond issuance by affected countries, and to create a special investment vehicle that would tap money from both public and private investors within and outside of the euro-zone. 

What does it mean for equities and risk assets? After two months of de-rating driven by perceptions of sovereign defaults and systemic banking risks, we expect the equity risk premium to fall as the tail risk of a disorderly Greek default and banking crisis have been averted. This suggests that the rebound in risk assets that has been underway in recent days may well continue for some time.     

Therefore, we upgrade our tactical assessment of stocks from underweight to neutral. This translates to a three percentage points increase equities in our conservative profile to 18% and five percentage points for balanced and growth profiles to 35% and 55% respectively.

However, we remain cautious in the medium term for a few reasons. For one, it is still critical how all these will be turned into detailed points of action and implemented in the coming weeks. But more importantly, the global macroeconomic outlook remains weak and policymakers having already spent most of their options can't do much about it. Also, investors may just return to focus on the US and the dysfunctional government there just doesn't inspire much confidence either.