Man Up, Europe

Euro bills and coins in cash register tray
Euro bills and coins in cash register tray

European leaders can't seem to agree on how - or whether - to help Greece. But they sure aren't helping the euro.

Feeling a little stiff in the neck? I wonder why. On Friday, European finance ministers held a semi-secret meeting in Luxembourg, and discussed Greece's problems. Rumors swirled that new aid terms might be on the way, but ... apparently not.

Then on Tuesday morning came a report that a Greek aid package worth about $81 billion was in the works, which made the euro pop. But that report, too, was swiftly debunked.

Meanwhile, Christine Lagarde, France's finance minister, said that Europe would have to keep funding Greece, and that there was no chance of a restructuring or of Greece leaving the euro zone. But in Finland, the True Finns party has announced its opposition to any future bailouts, and officials there struggled to come to an agreement on aid for Portugal.

Greece can hardly continue in its current state, but "A solution that is workable for everyone appears hard to come by," wrote Simon Derrick, chief currency strategist at BNY Mellon, in a note to clients. No kidding.

"While simply providing Greece with more money might look like the simplest short term solution (and one that seemed to receive overt support from Christine Lagarde overnight), it seems likely that the northern states are unwilling to go down this route, at least not without some form of change to the existing securities.

"However, the alternative of extending the maturities on its borrowings from the euro zone would leave Greece skirting the very edges of what S&P would consider a “selective default” (dependent upon whether similar demands were extended to private creditors)."

It's a nice debate - but it's time for European leaders to stop squabbling and come up with an effective plan for Greece. Yes, the leaders have domestic political concerns, and yes, there is the question of whether Portugal and Ireland, the other ailing euro zone members, will ask for concessions if Greece gets better terms. But the uncertainty isn't doing anyone any good. Greece is finding capital markets harder to access, its citizens are becoming more and more frustrated - and the euro has dropped roughly 5% since this latest round of uncertainty began little more than a week ago. With the sizable net long positions in the currency at the beginning of May, you'd have to believe that a number of investors have gotten burned.

But what should leaders do about Greece?

Martin Wolf, in a column for the Financial Times, advocates a debt restructuring, and soon. He says the delay in developing a plan is akin to waiting for a horse to talk.

"Postponing the day of reckoning will not make the Greek predicament better: on the contrary, it will merely make the debt restructuring more painful when it comes," he writes.

Derrick told me he believes a mild solution, probably some kind of debt extension, might be received the most favorably by investors - although it might provide only a temporary floor for the currency.

In any case, Derrick is negative on the euro.

"I have to say that I would not be surprised to see the euro keep falling from here," Derrick told me. "Would I be overly surprised to see us back at the levels of the beginning of the year, when the euro traded in the high $1.20s and the low $1.30s? No, it wouldn't surprise me at all.

"The euro zone story is clearly iffy," Derrick added. "The euro is overvalued, the euro situation still looks highly uncertain, and the story with Greece just adds to the uncertainty."

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