European finance ministers have given themselves until Monday to agree on a bailout plan for Greece. Despite their best efforts during an unscheduled meeting on Tuesday night, there’s no sign that an agreement is at hand.
Nonetheless, the euro has held up relatively well amid the chaos. The euro rose to $1.4433 on Tuesday, up 0.1 percent for the day, and above the 55-day moving average of $1.44057 — a “positive sign,” according to Reuters. Traders will now see whether the euro can rise to $1.4508, thereby recouping half of this month’s selloff, Reuters reports.
“The $1.44 level for the euro is still pretty impressive, in my opinion,” says Jessica Hoversen, a G10 currency strategist with MF Global. “If the restructuring of Greece’s debt makes all parties happy, the euro can continue to move higher,” she says. The framework for an agreement isn’t yet in place, though.
The meeting of finance ministers on Tuesday didn’t bridge the gap between Germany and the European Central Bank (ECB). Germany wants private investors to share in the pain of a Greek restructuring. The ECB has argued forcefully that such a restructuring would amount to default, leaving Greece unable to use its debt for collateral at the central bank.
Mario Draghi, the likely next president of the ECB, said the bank might accept a purely voluntary plan that allows private investors to participate in the bailout. One model, according to the New York Times, is the 2009 Vienna Initiative, in which lenders rolled over debt to central and eastern European countries. If Greece is allowed to default, Ireland, Portugal and Spain may demand similar leniency.
There’s a real fear of contagion. There is concern among ECB officials that a default by Greece would wreak havoc in the credit and currency markets, especially in derivatives markets where transparency is limited and market action is difficult to predict. German officials, however, are worried that the bulk of a purely public sector bailout of Greece will fall primarily on the shoulders of German taxpayers.
What is the lesser of two evils? “I think the ECB is right,” Hoversen says.
European officials provided Greece with a 110 billion euro bailout last year, and a second bailout is expected to be in the range of 80 billion to 90 billion Euros. The finance ministers plan to reconvene Sunday and Monday. Hoversen is expecting a concrete plan for Greece to emerge from that meeting.
At that point, Spain becomes the lynchpin for Europe, says Hoversen. “If fears over the solvency of its banking system and government escalate, risk aversion will go from simmer to boil.”
German banks hold about $242 billion dollars worth of Spain’s debt. Their exposure to Greece was estimated at $70 billion in the third quarter of 2010 and probably is lower today, Hoversen says. French banks have about $90 billion of exposure to Greece and about $225 billion of exposure to Spain.
If the bailout for Greece is acceptable to all parties, the agreement also could be a catalyst for the dollar, according to Hoversen. “There could be upside for the dollar in the second half of the year,” she says. “One caveat: there must be an acceptable outcome for Greece.”
