Home > The Merk Perspective > Merk Insights > May 20, 2011

Merk Commentary: ECB Pushing Greece Over Brink

Axel Merk, Portfolio Manager, Merk Funds

May 20, 2011

Axel Merk
May 20, 2011

Disagreements on how to address Greece's reform process boiled over this week when European Central Bank (ECB) President Trichet walked out of a meeting. Trichet warned if Greece were to extend the maturity of existing debt, the ECB would stop supporting Greece.

We have long argued that it is not in Greece's interest to default at this stage because Greece needs to get its primary deficit under control before restricting its debt. As further reforms are implemented, the risk/reward ratio for Greece will change to potentially favor a default to reduce its debt burden. Delaying any default benefits Greece because any default now would impose an immediate adjustment of the primary deficit as it may be impossible to get new loans at palatable terms.

However, if ECB deserts Greece, the risk/reward assessment for Greece is changing. If the ECB gets too tough on Greece, dynamics in Greece may drive political dynamics to favor a default or even a re-introduction of the drachma.

Mind you that this would not be in Greece's interest: a default now won't fix Greece's underlying structural issues. Leaving the eurozone might cause an implosion of Greece's financial system. But from Greece's point of view, if they feel deserted by the ECB, political dynamics may favor the worst of the bad choices at hand.

As far as the banking system in the rest of the eurozone is concerned, we know that central banks, including the ECB, are bad poker players. If the ECB indeed pushes Greece over the brink though, they would provide ample support to the rest of the banking system. It would certainly expedite the process of raising more capital in the eurozone banking system (some of which through national governments).

Axel Merk
President and Chief Investment Officer
Merk Investments, Manager of the Merk Funds

This report was prepared by Merk Investments LLC, and reflects the current opinion of the author. 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 a solicitation or an offer to buy or sell any investment security, nor provide investment advice.

Thank you for your interest in the Merk perspective. To serve our audience better and to continue offering our insights free of charge, please enter your information below to continue reading.

Your Role:
Please sign me up for Merk Insights, our Free Newsletter:

Merk Funds will not sell or rent your name or contact information; our privacy policy is available by clicking here

To return to the homepage, please click here.