PIMCO's El-Erian predicts Greece, others will default

TAIPEI Wed Jun 22, 2011 8:00am EDT

Mohamed El-Erian, CEO and Co-Chief Investment Officer of PIMCO, speaks at the panel discussion ''The Shape of Things to Come: Understanding the New Global Economy'' at the 2011 The Milken Institute Global Conference in Beverly Hills, California May 2, 2011. REUTERS/Fred Prouser

Mohamed El-Erian, CEO and Co-Chief Investment Officer of PIMCO, speaks at the panel discussion ''The Shape of Things to Come: Understanding the New Global Economy'' at the 2011 The Milken Institute Global Conference in Beverly Hills, California May 2, 2011.

Credit: Reuters/Fred Prouser

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TAIPEI (Reuters) - The head of PIMCO, the world's biggest bond fund, predicted that Greece and other European economies would default on their debts to resolve their problems as the euro area deals with its debt crisis.

Greece's government won a vote of confidence late on Tuesday, a crucial step toward securing further short-term and longer-term financial aid from the European Union and the IMF as the country tries to avoid the euro zone's first sovereign debt default.

"For the next three years, we're going to see different economies work out different problems. For European economies, especially Greece, it would be through default," Mohamed El-Erian, chief executive of PIMCO, told reporters in Taipei on Wednesday via a video conference.

He didn't identify which economies other than Greece he was referring to.

El-Erian has suggested in the past that Greece would default and that Europe risks wasting money for nothing by pumping billions of dollars into the ailing economy.

"Nothing has been done to enhance growth," he said. "No single (Greek) indicator has shown strength. They are afraid a restructuring would hurt European banks."

He doubted a Greek default could trigger another global financial crisis.

"Ireland, Portugal, Italy and Spain would have to be involved. But Greece is too small in terms of economic impact," El-Erian said.

PIMCO, or the Pacific Investment Management Co, is based in California and is the world's biggest bond fund manager with nearly $1.3 trillion in assets under management.

Horacio Valeiras, chief investment officer of fund firm Allianz Global Investors Capital (AGIC), predicted that Ireland and Portugal, countries that also received financial bailouts in the wake of the global credit crisis, will have to restructure their debts.

PIMCO and AGIC are units of German insurer Allianz, which organised briefings for the media and investors.

"We are not investing in Greece, Ireland, Spain and Portugal," said Valeiras, who appeared in person at the press briefing. He said default in Greece was "inevitable".

The confidence vote in Athens came after a European ultimatum requiring the debt-choked state to agree to a five-year austerity package of measures within the next two weeks or miss out on a 12-billion euro tranche of aid money.

Without the loan, Athens will run out of cash next month and policymakers fear a default would send shockwaves through the global financial system.

European officials are also considering a second bailout package worth an estimated 120 billion euros that is meant to extend Greece's year-old 110 billion euro deal and fund it into 2014.

Sovereign debt elsewhere in the developed world has also soared since the global crisis, affecting investment decisions.

The fiscal weight of the global financial crisis prompted PIMCO to dump U.S. sovereign bonds. The fund's $236.9 billion PIMCO Total Return Fund said in March it had completed a move in February to drop all its investments in U.S. government debt.

Earlier this month, Tomoya Masanao, the head of Japan portfolio management for PIMCO, said the fund manager had cut holdings of Japanese and U.S. government debt to shift money into more attractive investments, such as debt issued by the likes of Australia, Canada, Brazil and Mexico.

(Reporting by Faith Hung; Editing by Neil Fullick)

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Comments (13)
Trikeriotis wrote:
Dear all and Mr.Mohamed El-Erian. One doesnt have to be too smart or in tune with the market on a day to day to figure out that Greece along with Italy, Spain, Portugal and other european countries will default sooner or later as they have no real structures in place except of the northern European countries where they are substantially more organized and within their own limits.

I am not an economist by trade but i have been in many countries and worked in many of them and have set up companies and i know first hand the problems and complexities and Mr. El-Erian is 100% correct. It is a matter of time when greece will default as there is no way that a country with no systems and infustructure and without a production base and where corruption and a black economy is above 30% and i dont beleive what the governments say, can turn this situation around witha debt mountain of 170% of GDP.

They will default sooner or later and many others in th EU will also do as Germany and the richer EU countries will stop funding these bail outs.

A total waste of money, effort and resources and specially when none of these actions are helping the poor, the small business, the young people and the retirees.

In my opinion they have missed the big picture many years ago and this is just the beggining of the end result of years of mistakes, corruption, theft and wrong decesions not only in Greece but for many countries in the EU and outside of the EU.

Humans seem to be acting and changing far slower than their envioroment.

Jun 21, 2011 12:14am EDT  --  Report as abuse
CostasHaramis wrote:
Mr. El Erian, and many just like him, continue shouting “fire” in the proverbial crowded movie theater. Yet, the movie continues.

If I may be allowed a prediction, too: In the end, the only thing Mr. El Erian is going to achieve with all this hot air is to make mountains of popcorn, but no money.

Then again, he is essentially in the popcorn business, after all…

Jun 21, 2011 12:52am EDT  --  Report as abuse
kc10man wrote:
And if Greece, Spain, Portugal, Ireland etc.. do default, what will happen with the Euro? Will the EU try to fix the Euro to the dollar? Or will they just let it free fall and hope to get some sort of export boost that will help counter a bigger economic collapse. What about the Chinese government, which has gone out of their way to buy Greek and Portuguese bonds to help those governments stay afloat?

I do not expect that the northern states will be willing to let the south crash the EU. They will bail them out to the end. If you look at the big picture, the debt problems in EU states (other than lazy Italy and sleepy Spain) are not so much, a 100 billion Euro “gift” from the north would solve those EU problems. As for Italy and Spain, they might just have to learn how to work a little harder, and maybe learn how to make some more quality high tech products. Tomatoes and animosity will not make up the budget gap.

Jun 22, 2011 1:11am EDT  --  Report as abuse
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