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ECB Urges Bank Recapitalizations

Interest-Rates / Credit Crisis Bailouts Jul 08, 2010 - 02:48 PM GMT

By: Axel_Merk

Interest-Rates

European Central Bank (ECB) President Jean-Claude Trichet, in his press conference following the central bank’s monthly meeting, built on the more confident tone set in recent weeks. Mr. Trichet suggested improved market conditions are a reflection of the decisive and constructive actions taken by eurozone governments.


Quizzed on why interbank lending rates have gone up as of recent, Trichet stated the move is a rational market reaction as a total of €244 billion in liquidity has been withdrawn from the markets during ECB refinance operations over the past two weeks. However, the liquidity reduction was bank-induced, as unlimited liquidity was offered by the ECB; as a result, the reduction should not be construed as a signal of tighter monetary policy (the €442 billion 12 month liquidity facility was replaced with a €132 billion 3 month and €111 billion 6 day facility, a €199 billion reduction; the following week, another €45 billion was withdrawn in the rolling of short-term facilities).

A good portion of the ECB press conference was dedicated to questions concerning the banking system. It shall be noted that this topic must have also been a central part of the deliberations as Olli Rehn, European Commissioner on Monetary and Economic Affairs, attended the ECB meeting. Since taking his position earlier this year, Mr. Rehn has taken an increasingly public profile in promoting and coordinating eurozone reforms and initiatives.

Little detail was given on the “stress tests” under way, except that Trichet emphasized that banks must improve their balance sheet by

•Retaining earnings;

•Raising capital in the markets;
•Taking advantage of government help where available and needed.
Rather than merely mentioning this plea in his prepared statement, as had become routine in recent months, Trichet emphasized the need for banks to take action multiple times during the Q&A.

Trichet brushed off criticisms the stress tests may be too benign, indicating the details are up to the local banking supervisors (although they coordinate with the ECB); the testing parameters and results would be published July 23, 2010.

We conclude Trichet sees improved bank capitalizations, rather than lower interest rates or quantitative easing, as key to lower interbank lending rates. Coercing banks to raise capital is the most positive potential implication of stress tests; such tests – in the U.S. and Europe alike – cannot possibly address all concerns in the markets.

As all too often, the public expects the ECB to have the solutions to all of the eurozone’s problems, but Trichet wisely - yet in the face of criticism – focuses on the big picture and forces governments and financial institutions to fulfill their duties in improving market conditions by pursuing necessary reforms. The good news is that the Spanish banking supervisors in particular are taking their work very seriously, even as both the tests and associated transparency are likely to fall short of demands in some eurozone countries.

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. This analysis is a preview of our annual letter to investors; to learn more about the Funds, please visit www.merkfunds.com.

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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