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Just when we thought that the European leaders’ meetings last month have done the trick for the euro, a speech by Angela Merkel brings Greece’s vulnerability back into the spotlight.

Among the major topics discussed by Merkel yesterday is Greece’s need to step up its efforts in reigning in its debt. Merkel warned that if the financial program promised by the government isn’t implemented soon, then the country wouldn’t be receiving its next bailout tranche. Talk about driving a hard bargain!

I don’t blame the Greeks if they suddenly feel corned here. Since the European leaders had granted its bailout package, the government has already gotten its bond investors to accept a 50% haircut, and it has already agreed to make major budget-related changes.

Unfortunately, Greece is still stuck between a rock and a hard place. The government needs to do something, and it needs to do it quickly. A German newspaper reports that the IMF believes that Greece has three main options.

The first one is a stricter and more refined budget consolidation plan. This would allow Greece to plan their spending better, and of course, reduce the costs.

Another option that Greece can do is to make investors share an even larger part of the debt write-down. Remember the 50% debt haircut? Well, the IMF now thinks that the investors should have to absorb more losses in order for the move to be effective.

Lastly, eurozone members can band together once again and provide a larger bailout package for Greece. Easier said than done considering that the IMF is already having a hard time coughing up funds, but it’s still a pretty good option.

As serious as the threat of Greece’s insolvency is though, it appears that It that the euro’s performance is now reflecting its fundamentals instead of traders’ sentiments, as investors slowly accept the possibility of huge losses on sovereign debt holdings and a really bad recession in the euro zone.

The euro has dropped roughly 3% in the fourth quarter of 2011, but the S&P 500 marked its best three-month rally since 2009!

Does this mean that fundamentals is beginning to be the primary driver of price action again? If so, how will a possible Greek default affect the euro’s price action? Ah, we’ll see what happens in the next couple of days as European leaders meet to discuss the region’s problems!