May 21, 2012

PIMCO’s El-Erian: Greek Euro Exit ‘Probably Inevitable’

Monetary union should plan for it to ensure stability, bond chief says

Once it happens, will anyone really be surprised?

Greece may have to exit the 17-nation eurozone and the monetary union should plan for it to ensure stability, Pacific Investment Management Co. CEO Mohamed El-Erian told Bloomberg Surveillance, a radio program with Tom Keene and Ken Prewitt.

“A Greek exit will be expensive and messy, but it’s probably inevitable and therefore we should plan for it,” El-Erian said.

PIMCO is the world’s largest manager of bond funds.

As the news service notes, Group of Eight leaders on May 19 urged Greece to stay within the euro area as polls in the country showed a close race between parties supporting and opposing the European Union’s bailout deal. The country is preparing for June 17 elections, following an inconclusive May 6 ballot.

The economies of the union are being gripped by political confusion as policy makers fail to develop solutions to address Greece’s worsening financial crisis, El-Erian said, according to Bloomberg. Investors pricing in both a “policy risk premium” and a “complexity risk premium” are adding to volatility in markets.

"The euro has lost 3.7% against the U.S. dollar this month and almost $4 trillion has been wiped from equity markets amid concern the turmoil in Greece may weigh on other members of the economic union," he said.

Germany, France, Italy and Spain, the union’s four biggest economies, need to take the lead in solving the crisis by creating a smaller currency union that is “less imperfect,” said El-Erian, a former deputy director of International Monetary Fund.

“For Greece there is no first best,” El-Erian said. “They’re looking at a series of fifth and sixth bests. They have to focus on which step allows them medium-term viability.”

Reprints Discuss this story
This is where the comments go.