April 28, 2010

Congress to examine impact of Greece money woes

Congress announced hearings into the potential impact the monetary crisis in Greece will have on markets in the U.S. and abroad. Congressman Paul E. Kanjorski (D-PA), Chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises said the hearings will specifically examine the effect of credit default swaps on government debt and the potential implications of the Greek debt crisis.

"Going forward, there could be important implications for the issuance of all government debt, especially when bankers act as casino operators by first helping governments to issue bonds and then facilitating bets against the failure of that debt," Kanjorski said in a statement. "Some, particularly in Europe, have additionally raised questions about the accuracy of disclosures of government indebtedness and the transparency of credit default swaps on these obligations. This regrettable situation could also ultimately lead to real repercussions for the European Union and the global economy."

"A better understanding of the role of derivatives, especially credit default swaps, in sovereign and state government debt. Specifically, whether the rise in use of CDS has had a negative effect on sovereign debt in countries like Greece," added Rep. Carolyn B. Maloney (D-NY), who requested the hearing, when asked what she was hoping to accomplish.

While Greece's growing solvency and debt concerns have made headlines in recent months, some experts caution against overreaction.

"[Greece's problems] must be put in perspective. Greece accounts for just two percent of the GDP of the Euro zone," says Axel Merk, president and CIO of Merk Funds, which includes the Merk Hard Currency Fund. "What's needed now more than anything is clarity. It's the uncertainty that is causing the problems. It's not just a monetary question for the European central banks, but a question of political will on the part of European leaders for some sort of sustainable, longer-term solution."

According to Merk, if Greece is given a temporary cash infusion, it will have little if any impact. An alternative solution, to send money with few conditions attached would narrow Greece's bond spreads, Merk says, but it would then cause the debt of countries like Germany, named as a potential underwriter, to increase.

"What I think should happen is to put Greece into some sort of conservatorship, we're they would not be able to spend money," he says. "I think what you'll see is some sort of compromise, where the IMF will institute strict measures, but will also come up with pretty significant help."

And if Greece is allowed to fail?

Not the end of the world, says Merk. "Actually, it would be one way to provide the needed clarity I mentioned, which would lead to a pretty good buying opportunity for the Euro. We're actually buying the Euro in our currency fund now. I think the political will is there to help Greece, but either way it's the uncertainty that's hurting most."

Washington Bureau Chief Melanie Waddell contributed to this story.

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