LONDON, July 14 (Reuters) - An investor with a stomach strong enough to buy Greek bonds late last week could be sitting on a profit of over 50 percent on Tuesday even though Grexit risks have not been fully averted.
Greece struck an aid-for-reforms deal with its creditors on Monday, though significant hurdles remain. Failure to reach agreement would have hastened a Greek exit from the euro.
Bond prices in Greece rose to 44-67 cents in the euro on Tuesday, from a 51-cent close and lows of 29-43 cents last week, in reaction to the Monday deal. The two-year bonds are at the highest price and the 30-year paper the lowest.
Investors took heart from the fact that Greece honoured its commitments to private lenders, choosing not to pay the International Monetary Fund, its most senior creditor.
However, that does not take away the fact that if Greece leaves the euro zone at a later date - still a possibility if its third bailout programme is not implemented - it may not be able to pay private creditors either.
"The exit probability has gone down significantly with the agreement but the ... (problem) is it will go off track almost certainly and then what?" said Oxford Economics head of global macro research Gabriel Sterne, who thinks Greek bonds are already overvalued.
"But people are playing for the next month, not for the next years."
Distressed debt brokerage Exotix's senior economist Jakob Christensen, who said some hedge funds had bought Greek debt at their lows, sees fair value for Greek bonds at 54 cents on average with a 20 percent chance of Grexit, a 40 percent chance of strong implementation of the bailout and a similar chance of a weak implementation. Prices could oscillate between 17 and 67 cents depending on which scenario becomes more probable.
"It is a difficult call, as there are still significant hurdles to reaching and implementing an agreement - fiscal, privatisation, structural reforms, etc," he said.
Should Greece leave the euro, its euro-denominated debt yields would hit such high levels after the devaluation of its own currency - perhaps the drachma - that almost all its private debt would need writing off for the burden to become bearable.
In a research note sent on July 7, Morgan Stanley strategists Robert Tancsa and Paolo Batori said bonds would hardly be worth anything in case of a Grexit.
They assumed a drachma rate of 1.5 to the euro, a rise in debt to 2.5 times economic output, and that the IMF and the ECB were exempt from having their loans restructured, with only euro zone countries and the private sector taking a hit.
After restructuring, total debt should fall to about 75 percent of the gross domestic product, they said. To reach that, Greece would need to apply a 93 percent reduction in the face value of its bonds.
Whatever debt remained after that would still need to trade at a price that compensates investors for future repayment risks and other factors, such as inflation and official interest rates -- an exit yield, which Morgan Stanley estimated at 9 percent.
With those factors taken into account, the fair value of Greek bonds was 4 cents in the euro, they said. (Editing by Nigel Stephenson and Louise Ireland)