Greece Requires Conservatorship

By: Axel Merk | Wed, Apr 28, 2010
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In our assessment, Greece should be placed into conservatorship by the European Commission. Greece's liquidity issues have morphed into a solvency crisis. Greece's challenges are fiscal, which requires a political solution. Therefore, Greece's problems cannot be resolved by the European Central Bank (ECB), although ECB policy can affect the dynamics as this crisis evolves. It is paramount to receive clarity on the political path chosen; closed-door deliberations may avoid the hastened band-aid approach employed by U.S. policy makers at the peak of the financial crisis, but are only good if it leads to substantive results.

As we see it, a variety of options are possible to address Greece's challenges:

The European Treaty does not provide for conservatorship, making our preferred scenario an unrealistic one. However, the IMF is the one institution with the credibility and experience to impose and supervise credible austerity measures. Governments are not like investment banks: governments bleed, they don't evaporate; solutions are rarely black and white. As a result, policy makers should work hard on imposing credible and sufficient restrictions on Greece through all available means. While the European Commission may not be able to seize control, Greece is able to yield control to aspects of its finances.

Whether or not a debt restructuring (partial default) is part of any arrangement remains to be seen; in our assessment, the credibility of any announced plan will be more relevant in calming the markets; having said that, a debt restructuring would make a plan more credible in the absence of other measures to restrain Greece.

With regard to the size of any bailout, the IMF may well be willing to give a multiple of what is on the table. ECB President Trichet traveled to Germany on Wednesday to communicate the urgency of the political leadership in the eurozone to act on a comprehensive solution to Greece, saying: "to us it is extremely important that the decisions are taken extremely rapidly." It would be helpful to have an announcement within days, preferably before the next scheduled ECB meeting and press conference on May 6.

We have long argued that Greece will ultimately be seen for what it is: a struggling country, whose GDP comprises a little over 2% of eurozone GDP. It is now up to the political leadership to decide whether this will take days, weeks, months or years.

 


 

Axel Merk

Author: Axel Merk

Axel Merk
President and CIO of Merk Investments, Manager of the Merk Funds,
www.merkfunds.com

Axel Merk

Axel Merk wrote the book on Sustainable Wealth; peek inside or order your copy today.

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.

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