httpvh://www.youtube.com/watch?v=glHDJ7JCYmg

And so with great thunder and bold enterprise the Eurozone got together yesterday and they have managed to thrash out a deal that will, in their eyes, keep Greece funded while protecting the European banking sector and make sure that further contagion is not seen in other countries.

The plan provides another bailout totaling EUR109bn to Greece, of which the private sector (banks and pension funds) will have to contribute around EUR37bn, alongside a plan to extend the time needed to pay back any outstanding Greek debt by up to 30 years. 30 years; you don’t get that for murder!

The other key component is that the European Financial Stability Fund will be able to buy peripheral debt in the markets. The total package is worth around €440bn but whether that amount is paid out remains to be seen. As you can see from EURUSD, GBPEUR and EURJPY figures, the markets love this as it means more funds to play with and stabilises the bond markets by providing a bid.

This evokes memories of the Marshall Plan, America’s efforts to rebuild Europe’s economies after the second world war. The focus will be on investment and growth, predominantly in Greece however and they will be helped by better interest rates than they had previously been able to obtain. Initial reports suggest that the rate will fall to 3.5% from 4.5%.  The EFSF would also be able to offer “precautionary credit lines” to countries in the Eurozone who are struggling to borrow, in an effort to stop them requiring a full bailout. So the trillion euro question is will it work? It is not what we wanted to see as we think that a Eurobond scenario is more long term solution and we expect to end up there anyway but in the mean time it seems to calmed markets somewhat.

There are some things we are worried about; the French President Nicolas Sarkozy was quick to say that this plan was for Greece and only Greece and that all other nations would be fine under existing conditions and we would like to believe him. But this is what happened last time; first Ireland wasn’t Greece and turned out to have the same problems as Greece, then Portugal wasn’t Greece and the same issues crept up again and now New Greece isn’t Old Greece. All in all, we think he may have hamstrung himself there if the worst comes to the worst and the contagion spreads elsewhere.

Secondly the bond swap plan does include some private investors taking losses on some holdings. We have to wait to see what the ratings agencies will say and whether they classify it as a “selective default” and how that impacts on confidence. I would say some of it is priced in already but even so, this is new territory we are crossing into here and so caution is advised. Trying to call the euro over the next few weeks is very difficult at the moment and I think we must wait for the dust to settle from this. If I were to venture an opinion it would be that it will remain elevated today and we may see some weakness next week.

Today’s calendar is very quiet, and most people will still be picking over the bones of last night’s deal. German IFO is the only real concern and that is expected to slip back to 113.7 vs 114.5 previous.

Latest exchange rates at time of writing