June 27, 2011

PIMCO’s El-Erian: Europe at Risk Over Greek Debt

Wrong treatment of sovereign debt could ‘contaminate’ continent

Mohamed El-Erian, head of PIMCO, said over the weekend that a restructuring of Greek debt is inevitable and that failure to address the country's problems correctly could contaminate the rest of Europe.

Reuters reported that El-Erian (left), appearing on the program Fareed Zacharia GPS,said that current measures being taken to keep Greece from defaulting were inappropriate. "It is inevitable that Greece will have to restructure its debt. Europe has been kicking the can down the road, treating Greece's problem not as a solvency issue, but as a liquidity problem," he was quoted saying.

Key votes are planned for the Greek Parliament on Wednesday and Thursday on additional austerity measures designed to induce the European Union (EU) and International Monetary Fund (IMF) to release a tranche of funding amounting to 12 billion euros ($17.2 billion). But El-Erian says he does not think the vote will solve the problem. "Greece has too much debt and cannot grow until these problems are solved. More and more of Europe is going to be contaminated," he said in the report.

While he is also bearish on the debt situation in the U.S., he said that the situation was fundamentally different in that America has more time to resolve its issues. "It supplies the dollar as a reserve currency, it supplies the deepest financial markets, which means that other countries were willing to outsource their savings," he said.

Still, PIMCO is looking outside the U.S. for government bond investments. "It's an issue of valuation. U.S. bonds have benefited enormously from the Federal Reserve buying them under the QE2 (quantitative easing) program which ends at the end of June," he said. "So when we look at Treasuries, we see the big buyer stepping away from the market, and we ask who else is going to be buying at these levels, and we can't identify another buyer of the size of the Fed."

He added that the market underestimated how hard the end of the Fed's $600 billion government bond-buying program would hit.

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