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ECB - Greece is Convincing

Interest-Rates / ECB Interest Rates Mar 04, 2010 - 04:36 PM GMT

By: Axel_Merk

Interest-Rates

At its monthly press conference, European Central Bank (ECB) President Trichet announced a further gradual reduction of emergency lending facilities. Focus of the meeting was the fiscal austerity package passed by Greece's parliament the previous day. Unlike previous commentaries, Trichet was full of praise for Greece, saying it was "extremely important that the decisions taken by Greece could be convincing because they would credibilize [sic] the adjustment program that was absolutely necessary."


Trichet did not answer whether Greek's actions would sway the ECB to accept Greek debt as collateral in ECB funding operations in case further downgrades technically disqualify them as collateral. However, he did say, "what has been decided [by the Greek government] is very substantial is approved as being convincing by the governing council [of the ECB]."

Trichet built on his recent comments that the eurozone is working as designed, saying, "the European institutions have functioned. There has been the appropriate surveillance of the policy pursued by that particular country according to the requirement by the stability and growth pact; the Commission has done its job. ... I will say this is the functioning of the European institution following the Treaty and each institution in its own role."

Separately, Greece today sold 10-year euro bonds that attracted heavy demand.

While Greece is not out of the woods, we agree with Trichet. In our assessment, Greece is taking necessary steps to regain confidence; those steps are a result of a) market forces threatening to shun Greece from the credit markets and b) European institutions providing a balance of carrots and sticks. This doesn't mean it will be a smooth ride - a crisis, by definition, is not; it also doesn't mean the cost of borrowing for Greece will plummet; finally, it does not mean the rest of Europe will bail out Greece. However, it does mean that a process of normalization can begin where Greece will ultimately be seen for what it is: a struggling country comprising 2% of the eurozone GDP.

Greece will be in charge of its own destiny: hedge funds have not caused Greece's problems; and Germany can't fix Greece's problems, either. After taking very serious austerity measures, Greece may want to consider broadening the tax base - not through more tax increases, but by providing an environment where its citizens are encouraged to work within the system rather than the black market economy. Trust can go a long way, not only in the debt markets, but also in rebuilding an economy.

We manage the Merk Absolute Return Currency Fund, the Merk Asian Currency Fund, and the Merk Hard Currency Fund; transparent no-load currency mutual funds that do not typically employ leverage. To learn more about the Funds, please visit www.merkfunds.com.

By Axel Merk

Chief Investment Officer and Manager of the Merk Hard and Asian Currency Funds, www.merkfund.com

Mr. Merk predicted the credit crisis early. As early as 2003 , he outlined the looming battle of inflationary and deflationary forces. In 2005 , Mr. Merk predicted Ben Bernanke would succeed Greenspan as Federal Reserve Chairman months before his nomination. In early 2007 , Mr. Merk warned volatility would surge and cause a painful global credit contraction affecting all asset classes. In the fall of 2007 , he was an early critic of inefficient government reaction to the credit crisis. In 2008 , Mr. Merk was one of the first to urge the recapitalization of financial institutions. Mr. Merk typically puts his money where his mouth is. He became a global investor in the 1990s when diversification within the U.S. became less effective; as of 2000, he has shifted towards a more macro-oriented investment approach with substantial cash and precious metals holdings.

© 2010 Merk Investments® LLC

The Merk Asian Currency Fund invests in a basket of Asian currencies. Asian currencies the Fund may invest in include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund invests in a basket of hard currencies. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a hard or Asian currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfund.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at www.merkfund.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds owns and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

The views in this article were those of Axel Merk as of the newsletter's publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard and Asian Currency Funds. Foreside Fund Services, LLC, distributor.

Axel Merk Archive

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