Currency watch: Reform critical in Eurozone

We’ve had a fair few days that have been characterised as “key” or “structurally important”, but no day in the past few years compares to how important Thursday was for the fabric of the Eurozone.

Never have I seen so many people agreed on one thing; urgent reform is needed in the Eurozone or we risk the breakup of Europe as we know it.

While there has been some progress in the past week or so as far as different plans for the Greeks are concerned, I believe the markets are glad that EU politicians have had a bit of a rocket fired up them as this has gone on long enough.

You could argue that we have already seen the effect on the core that the International Monetary Fund warned of, with the yields on Italian debt rising close to the 6% level. For a problem that was said to be confined to the periphery it is having a dramatic effect elsewhere.

It looks like the EU are agreeing to a similar scheme to the American TARP package launched back in 2008. It effectively uses funds in the European Financial Stability Fund (EFSF) to buy bonds in the peripheral economies.

The total package is worth around €440 billion, but whether that amount is paid out remains to be seen.

As you can see from EUR/USD, EUR/GBP and EUR/JPY 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% and that they will have 15 years to repay as opposed to the previous time limit of seven-and-a-half years.

The EFSF would also be able to offer “precautionary credit lines” to countries in the Eurozone which are struggling to borrow, in an effort to stop them requiring a full bailout.

At the moment, the markets are taking to the plan but these are merely the first heartbeats of a patient post operation; the EU will still need round the clock care and a huge amount of rehabilitation.

Jeremy Cook is chief economist at World First foreign exchange