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Is the IMF to Greece what China is to the U.S.?

Interest-Rates / Global Debt Crisis Mar 24, 2010 - 08:26 AM GMT

By: Axel_Merk

Interest-Rates

If Greece eventually gets funding from the International Monetary Fund (“IMF”), it may not be so different from the U.S. getting its funding from China. There are two main fears in the eurzone against IMF involvement: a perception that Europe can’t solve its problems internally; and the potential influence of the IMF on European policies.


With respect to the former, in our assessment, Europe needs to swallow its pride. The IMF is equipped to deal with Greece. The European Union simply does not have the processes set up to deal with Greece. Not having a process is not necessarily a bad thing, as it ensures there is no easy bailout, forcing Greece to tackle its issues. That said, European leaders presently appear like a pack of headless chickens, with many notable voices publicly contradicting one another. Such politicking is the result of a lack of coordination. We don’t doubt that Europe is capable of coordinating help, but for the time being, most, we believe, would agree, that a good process is not yet in place.

From Greece’s point of view, they simply want access to cheap money. They don’t care whether the money comes from the IMF or the European Union. In that context, Greece is in a very similar situation to the U.S.: to fund its deficits, the U.S. doesn’t care where the money is coming from, as long as it is cheap. China has long been accepted as a convenient source of money to finance America’s spending addiction.

The argument in the eurozone about too much interference by the IMF into European politics is a fair one; however, is it all that different from the influence China has over the U.S.? To illustrate China’s influence, we would like to point to George H.W. Bush’s defeat in his presidential bid against Bill Clinton. At the time, tight monetary policy ahead of the election was cited as a reason why Bush Sr. lost. A consequence of China’s massive holdings of U.S. debt is that Chinese purchases can influence the cost of credit in the U.S., and with it, U.S. economic growth. Incidentally, China has been less active in buying U.S. Treasuries in recent months, possibly putting upward pressure on U.S. rates. Given the lag time such activity has to the real economy, China’s actions may potentially influence upcoming mid-term elections in the U.S.

There is, of course, a cure against influence by the IMF on Greece or China on the U.S.: it’s called living within your means. If Greece or the U.S. were to live within their means, they wouldn’t need to access the credit markets to finance their largesse. However, it’s an option politicians don’t like to hear.

There’s another parallel between U.S. and Greece: while the U.S. hasn’t faced a national strike because of its healthcare reform, the political process in both the U.S. and Europe can be an ugly one. Greece wants access to cheap money; France’s President Sarkozy, whose political fortunes are threatened, sees the IMF’s managing director as a political rival at home; Germany has the deepest pockets in Europe and isn’t about to hand out money for free. Caught in the middle may be the European Central Bank (ECB), which is most concerned about the integrity of the euro. In our opinion, this episode will deal a serious lesson to the eurozone and everyone invloved. The critics will need to learn that the euro can weather a storm; the European Commission needs to learn to be a more assertive leader in coordinating policy; and the ECB needs to learn to allow the political process to play its course, so they can focus on monetary policy.

And, maybe, at end the of the process, some will realize that the problem isn’t that Greece’s cost of borrowing is too high, but that access to money was too cheap for most of the past decade. In that context, we most appreciate ECB President Trichet's comments that any assistance for Greece should not be focused on lowering the cost of borrowing, but on providing emergency access to cash. In our assessment, it is a positive that the markets stepped in where policy makers failed, forcing Greece to institute tough austerity measures. Germany is absolutely right in not being bullied into a quick fix – when it comes to government problems – whether in Greece, the U.S. or elsewhere - quick fixes are difficult to come by.

By Axel Merk

Manager of the Merk Hard, Asian and Absolute Return Currency Funds, www.merkfunds.com

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies. Axel Merk wrote the book on Sustainable Wealth; order your copy today.

The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may 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 seeks to profit from a rise in hard currencies versus the U.S. dollar. 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 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.merkfunds.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.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own 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.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.

Axel Merk Archive

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