“They need a medium-term plan for greater fiscal integration and to promote growth,” said Balls, head of European portfolio management at Pimco in London, in a Bloomberg Television interview on “In the Loop” with Betty Liu. “Everybody expects a default in Greece. You need to have a plan to prevent contagion. You need to make it credible.”
Chancellor Angela Merkel of Germany and France’s President Nicolas Sarkozy promised after a meeting yesterday in Berlin a bank recapitalization blueprint that will overtake a 12-week-old rescue plan that has yet to be put into place.
Facing rising pressure to defuse turmoil that’s raged for 19 months and growing concern Greece is headed to a default, Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital. Sarkozy said they would deliver a plan by the Nov. 3 Group of 20 summit.
A plan to recapitalize banks without addressing Europe’s structural problems would be “insufficient,” Balls said. Pimco, based in Newport Beach, California, manages the world’s biggest bond fund.
The euro rose today as much as 2.2 percent to $1.3674 before trading at $1.3668 in the biggest rally on an intraday basis since July 2010. A drop in German bunds pushed 10-year yields to 2.08 percent, the highest level since Sept. 2.
Merkel and Sarkozy urged a “durable” solution for Greece’s debt load, indicating they may have moved beyond a July 21 plan that Luxembourg’s Jean-Claude Juncker called the “final package, of course.”
Their approach may spike a debt swap now being negotiated that would impose a 21 percent write-off for Greece’s debt and have investors take a bigger share of the losses.
Greek 10-year bonds dropped today, pushing 10-year yields up 28 basis points, or 0.28 percentage point, to 23.81 percent. German Finance Minister Wolfgang Schaeuble told Frankfurter Allgemeine Sonntagszeitung that euro governments may have come up short on the scale of Greek debt writedowns when they reached an agreement on private-sector involvement.
“After two years in which European policy makers have tended to overpromise and underdeliver, it makes sense to wait for evidence that they are actually going to be able to overcome all their coordination problems,” Balls said.
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