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The leaders of the European Union had a long night, but it was eventually fruitful. The banks agreed on a 50% haircut on Greek debt. Reaching such an agreement was in the works. Will Portugal also get a haircut now? Bank recapitalization and a €1 trillion EFSF were also agreed, although the details are still to be seen.

EUR-USD is  climbing  above 1.40 quite slowly. While this round number is watched by many, stronger resistance appears higher.

  • Bank Recapitalization: This was already agreed on Sunday, and the sum is about €106 billion. More details are emerging and this is helpful. Declarations without details are much less effective.
  • 50% Greek haircut: This was the maximum that France was willing to take. Germany wanted 60%. The banks offered 40%. While this half-half number seemed as the clear compromise, it took many long hours to strike a deal with the banks. The talks ended in the hide of the night in Brussels. This isn’t a 50% reduction on Greek debt. It’s only for the private sector. The official sector (EU, ECB, IMF) doesn’t participate. Is the debt pile sustainable now? This question remains open.
  • EFSF €1 trillion: Part of the current EFSF fund will be leveraged by a “few-fold”. A €2 trillion figure would be more convincing in order to convince the markets that Spain and Italy are seriously ring-fenced against contagion.
  • Italy pressed hard: The friends of the euro-zone’s third largest country pressed it to raise the retirement age in a move that angered many. Some progress was made there, although the reforms need to pass in the parliament. Dictations will likely meet opposition in Rome.
  • Growth: Unfortunately this is still absent.

Resistance for EUR/USD is at 1.4030, followed by 1.41 and 1.4160. Support is found at 1.3950, which was also the top of the 1.39-1.3950 range before the summit.

For more on the euro, see the EUR/USD forecast.

The euro climbed all the way from around 1.38 at the beginning of the summit. At first, it seemed that the summit was headed for a failure.

Signs of a partial success got the pair back to the range, and the final deal is even better. This isn’t a full success, but more than expected, and this is enough to send the pair higher.

A bigger EFSF, a bigger bank recapitalization and a haircut also for members of the official sector like the ECB would have made the plan more comprehensive, but given all the interests, this agreement isn’t bad.

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