PIMCO CEO and co-CIO Mohamed El-Erian spoke to Bloomberg Television’s Betty Liu on a wide range of topics on Thursday that included Europe’s crisis and the fact that the ECB is waiting for governments and the IMF to “step up” before taking further action.
El-Erian (left) also said that PIMCO’s investment tone is to “be careful” and that the bond fund is maintaining a “generally defensive and selectively offensive” investment strategy.
El-Erian on Mario Draghi’s press briefing today:
“Fascinating. He and the ECB have framed this saying that Europe does not just face a debt crisis, it is now looking at a mild recession and significant downside risk. Markets got excited when they heard ECB was stepping up support of the banking system with nonstandard measures. Futures went up. Then, the markets got disappointed when the ECB did not extend its help to struggling sovereigns, and then the markets got really disappointed when Draghi said I was misinterpreted last week when I mentioned fiscal compact. He did not mean this to be a signal the ECB was going to come all in. It is fascinating to watch the volatility. The ECB like everyone else is waiting for European governments, other European institutions, and the IMF to step up to the plate.”
On whether it’s the right move for the ECB to wait for the IMF and policy leaders to do something on the fiscal side:
“It is hard to tell. It is the right move in terms of maintaining the institutional integrity of the ECB. It is not the right move if you believe this crisis is getting worse and worse, and you need to have the Colin Powell doctrine of overwhelming force. There are judgments being exercised here. Critically, we need to see what happens tomorrow. The stakes have been raised hugely and the approach has changed. It’s a very subtle change but an important change. The original approach was to stabilize the periphery. Now, there is a recognition you need to strengthen the core of the eurozone, and that is why president Nicolas Sarkozy talks about things like another foundation for the euro. This is big, and we will look back at this as a big moment in history.”
On what should happen tomorrow to change the game for the crisis:
“If you want to change the game tomorrow, you need to come up with important and credible decisions. The first decision is a vision of what the eurozone will look like in three years. Will it be the same size or smaller and less than perfect? The second is a clear signal as to who will provide the bridge as the European governments implement all this, i.e. a signal the ECB would be willing to go all in. Third, you need a mix of not just debt and deficit containment, but also growth. We need to see these things come out tomorrow otherwise markets will remain very nervous.”
On the effect on the markets and global economy if the ECB falls short tomorrow:
“The downside risk to the global economy would increase even more. The ECB talked about it today. People are worried about it. That risk would increase more. If we fall short, the fragility of the banking system in Europe would increase and the costs of the peripherals would increase. There is a lot at stake.”
On reports that Europe’s central banks are considering resurrecting their individual currencies:
“I am not surprised. There are three possible outcomes. One is Europe succeeds in maintaining the current eurozone. Two is a smaller eurozone. Three, and hopefully this will never happen, is the total fragmentation of the eurozone with 17 countries introducing their own currency. That discussion about different scenarios is something that everyone should be having because there is a probability for each of these.”