Life, Euro Beyond Greece - Crystal Clear

By: Axel_Merk

Focus at today's European Central Bank (ECB) press conference was on the continued tremors rattling Greece. A couple of key points:

• The ECB refinancing collateral framework will introduce a gradual scale of "haircuts" starting 1/1/2011. We recently called for such a framework to provide an ECB mechanism to reward fiscal discipline. The framework continues to rely on ratings by rating agencies (our proposal called for haircuts based on a scoring system based on adherence to the stability and growth pact).
• ECB head Trichet clarified European Monetary Union rules that Greece shall not receive aid below market rates does not refer to Greece's market rates, but to the refinancing costs of those countries providing aid.
• There were many questions on what would trigger a rescue package. Trichet was very clear that it is up to Greece's judgment to ask for help. It's a question for political leaders, not for the ECB.

Many questions focused on the perceived confusion on why credit default swaps (CDS) for Greece are high and climbing; and why Greece's costs of borrowing continues to be much higher (with spreads widening) than that of other eurozone member countries.

Using a term that was used extensively during the press conference, to us, the situation is "crystal clear". It seems to us that many market participants are not aware that:

• Should aid be provided to Greece and the IMF be involved, loans granted by the IMF tend to be senior to outstanding government debt. It is absolutely justified by the market to demand a higher premium on outstanding debt given the prospect of IMF involvement.
• Further, while it is not known at this stage, IMF involvement typically includes a) austerity measures, b) currency revaluation and c) debt restructuring. Austerity measures have been announced and may or may not be expanded; a currency revaluation is not an option for Greece; but debt restructuring is. With IMF involvement, there's a high probability that existing debt may be restructured. Policy makers don't like to call debt restructuring a default, but it is a partial default that may trigger payment under CDS rules. As a result, it is perfectly appropriate for credit default swaps to rise.

Towards the end of the press conference, Trichet said the market is always right. We agree with Trichet - the pricing of Greek bonds and CDS is rational.

However, the market does need to learn that Greece comprises just over 2% of the eurozone GDP. As such, at some point, we believe, the market will need to get used to Greece's woes. There's life beyond Greece; as a result, we are positive on the long-term outlook of the euro.

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.

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