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El-Erian: How to Ease Threat to Global Stocks From Ukraine Crisis

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Federal Reserve Chairwoman Janet Yellen’s view that government support of economic growth is not going to disappear has lifted U.S. markets and those of emerging markets over the past few days.

But, according to Mohamed El-Erian, a lot more needs to happen to “decisively lift the cloud of the Ukrainian crisis that hangs over global equity markets.”

On Monday, the former CEO of PIMCO, who is now chief economic advisor to Allianz, shared a list of five conditions that could prompt investors to take a stronger, more robust view of global equities. His blog on Yahoo Finance highlighted the following:

1. After annexing Crimea, Russia cannot make any other serious political or military moves that would cause further global instability.  

“The hope is that this latest rounds of talks [between Russian and U.S. leaders], which started yesterday, would be a more effective catalyst to meaningfully de-escalate tensions; and quickly before some disruptive border skirmish occurs, inadvertent or otherwise,” he wrote.

2. Ukraine needs “tens of billions of dollars of exceptional funding” from the international community to support its economy, budget and foreign reserves.

Such financial resources are necessary, El-Erian says, so the country can pay public workers, including security forces, and safeguard basic supplies that it imports, such as Russian gas.

The International Monetary Fund, the economist says, is poised to pursue a “standby arrangement” with Ukraine of about $18 billion.

El-Erian cautions, though, that it’s unclear “whether the Ukrainian government would be able to implement the policy actions negotiated with the IMF. There are also questions as to whether private creditors would ultimately face haircuts on their claims on Ukraine.”  

3. Plans to strengthen Ukraine’s short-term financial and economic health need to be supplemented with “a broader policy response that places the economy of the path of higher medium-term growth,” the expert notes.

At the very least, this means the country must embrace a powerful “set of structural reforms to reverse what has been a pronounced period of economic underperformance,” he says.

El-Erian notes that the Ukraine went from having “a similar GDP per-capita level to Poland’s in the 1990s to just one-third today.”

4. Popular support is needed for new economic, political and social programs in Ukraine—including those required by the IMF. “The outcome of the upcoming elections are critical given the transitory nature of the current government,” he said.

“Working with parliament, the newly elected president and her/his cabinet would have to rapidly set about the challenging task of anchoring a durable social and political reconciliation process,” El-Erian added. “They would also have to ensure considerable domestic ownership for the economic reforms supported by the IMF arrangement.   5. Going forward, global leaders and institutions — mainly the United States — must develop “much better structures and mechanisms to deal with geopolitical crises,” according to the economist. 

The reason? There are simply too “few readily available circuit breakers to stop negative spillovers from the multiplying pockets of geopolitical risks,” El-Erian argues.

Neither the G-20 nor the G-8 “are playing much of a role today,” he explains. “The G-7 [G-8 minus Russia] is trying but faces challenges. It falls to the G-1 (U.S.) to take the lead in what increasingly is trending towards a G-0 world.”

El-Erian admits that he’s drafted “quite a list of conditions,” but warns “the market consequences go beyond the Ukrainian overhang. They also speak to the challenge markets face in better modeling and pricing geopolitical risk.”