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Eurozone Needs Markets Not Bailouts

Economics / Euro-Zone Mar 18, 2010 - 11:27 AM GMT

By: Axel_Merk

Economics

Deutsche Bank Chief Josef Ackermann is looking after his own house rather than the eurzone's interests in calling for a Greek bailout. If there is one thing the financial crisis has taught us, it is that simply patching up trouble spots may not be a recipe for increased structural stability. If there was a problem it is that Greece was enticed to spend too much last decade because its cost of borrowing was too low.


If Deutsche Bank is concerned about the fallout of Greek debt, the bank should heed European Central Bank (ECB) President Trichet's advice and take advantage of favorable market conditions to raise more capital.

There is a bright side to the Greek drama: the markets are reining in those who are fiscally irresponsible. In our assessment, the eurozone should work on reform that works with, rather than against, the markets:

  • German banks are exposed to just about any crisis in the world because their domestic fixed income markets are underdeveloped; as a result, German banks are at risk of overpaying in their quest to deploy their capital, plowing money into U.S. subprime mortgages and Greek debt, amongst others. To achieve a more stable German, European and global economy, domestic fixed income markets around the world must be fostered. Such a move increases transparency and stability throughout the markets. Increased liquidity in the eurozone fixed income markets would also make the euro a more formidable competitor to the U.S. dollar. Such change can't come overnight, but should be a priority for policy makers and financial institutions alike.
  • In our assessment, the euro is structurally sound. The ECB has pursued more robust policies than the Federal Reserve (Fed) throughout the crisis and is far further ahead in implementing its exit strategy. We are more concerned about UK sovereign debt than a contagion within the eurozone.
  • However, while the euro may be on a strong structural footing, the political process to discuss problems in a euro area country is not. We believe it would be most helpful if the European Commission on Economic and Monetary affairs took a greater leadership role in streamlining the debate. In this context, we applaud EU monetary affair commissioner Olli Rehn's comments today that remind all eurozone countries, not just Greece, about their fiscal responsibilities. In the absence of such leadership, there appears a lack of confidence by European policy makers in their own currency. The noise created in these discussions may add to instability and uncertainty; such noise, however, may be more a reflection of the weakness in the process, but not the substance.

We don't expect eurzone countries to reach their deficit targets anytime soon, but the eurzone, unlike the U.S., has rules in place to encourage fiscal restraint. Policy makers in the eurozone should now work on improving the process before contemplating bailouts. Greece certainly has major challenges, but when the dust settles it will likely be seen for what it is: a struggling country comprising 2 percent of the eurozone GDP. That's not a justification for a bailout to help Deutsche Bank recover paper losses. Over time, but not overnight, Greece will be rewarded with a lower cost of borrowing should they execute on their ambitious austerity measures.

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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