The euro hit 7-week highs in overnight trade, breaking through the $1.40 level versus the dollar as markets reacted positively to the news of a debt deal in Europe. Significant gains, however, could be difficult given that markets had already pushed the euro higher on hopes of a resolution. Little is known as yet about the finer details but what we do know is that there will be a 50% write down for private bondholders on their Greek debt, European banks are to be recapitalised to the tune of €110billion to allow them reach a capital position of 9% of Core Tier 1 by end June 2012, while the EFSF rescue fund is to be scaled up. Greek Prime Minister George Papandreou said that as a result of the burden sharing agreement the country’s debt burden is now sustainable.

Greece will produce no more primary budget deficits from next year, but some of the country’s banks may face temporary nationalisation as a result of the debt relief. Under a new €130billion euro deal, Greece will obtain €30billion upfront from other governments, as a guarantee for banks that will take part in the voluntary reduction of €100billion of the debt they hold. Papandreou said he expected the deal, which will be implemented through a bond exchange, to be wrapped up by the end of the year. He also said that the deal cuts Greece’s debt by 50 percentage points of GDP, compared with just 12 percent under a previous EU deal struck in July. Sterling has also reacted positively to the news of the debt deal, though its gains versus the dollar were still limited. This has allowed the euro to push higher versus the GBP. UK data released yesterday were disappointing, suggesting that the manufacturing sector is struggling. This morning sees the release of the CBI distributive trades survey for last month.