The agreement reached by Greek political leaders to win the nation’s second bailout may be “analytically questionable,” Pacific Investment Management Co.’s Mohamed A. El-Erian said.
“It is very unlikely to lead to growth, jobs, financial stability and new investments,” El-Erian, chief executive and co-chief investment officer of the world’s biggest manager of bond funds, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “This agreement will be very difficult to sell when the principals, those who have agreed, have to go to their constituents.”
Greece’s government agreed today to austerity measures needed for a 130 billion-euro ($173 billion) rescue package, according to an e-mailed statement from Greek Prime Minister Lucas Papademos’s press office. It completed talks with officials of the European Commission, European Central Bank and International Monetary Fund, a group called the troika, and political leaders agreed, according to the office.
Euro-region finance ministers will hold an emergency meeting in Brussels to discuss the bailout and a debt swap that will impose a loss of about 70 percent for investors. Luxembourg’s Jean-Claude Juncker, who leads the group, said there will be no final decision on Greece’s second bailout package at the meeting.
Greece faces a 14.5 billion-euro bond payment on March 20 and is struggling to secure financing to avert a collapse of the economy that could spark a new round of contagion in the euro area. Lenders have demanded officials sign on to measures ranging from a reduction in the minimum wage and lower pensions, to immediate job cuts for as many as 15,000 state employees.
“There is no can to be kicked down the road,” Newport Beach, California-based El-Erian said. “Every time you try and wait, the snowball gets bigger, the problems get bigger and the dynamics become more difficult to control. This is about a status quo that is very difficult to sustain.”
European banks own most of the 200 billion euros of Greek debt held by non-government investors. Hedge funds, pension funds, sovereign wealth funds and other “non-regulated investors” own a further 60 billion euros, according to estimates by Pavan Wadhwa, JPMorgan Chase & Co.’s London-based head of global interest-rate strategy.
Europe needs to continue to “build firewalls that can absorb technical contagion,” El-Erian said. “It is inevitable that If Greece stumbles, you will have technical contagion. The rest of Europe is on the right course. It is really the peripherals, in particular Greece and Portugal, that are yet to find the path that will restore them to financial stability.”
Markets should also pay attention to events in the Middle East, El-Erian said.
“Tunisia and Egypt implode,” El-Erian said. “Other countries like Syria and Iran explode, meaning they have regional effects. Markets should keep an eye on Syria and Iran.”
Iran’s nuclear ambitions, Syria’s bloody crackdown and Greece’s brush with default have added to the uncertainty in the global financial markets.
Pimco’s $250 billion Total Return Fund, the world’s largest bond fund, has returned 7.35 percent in the past year, lagging behind 51 percent of its peers, according to data compiled by Bloomberg. It gained 2.13 percent over the past month, beating 97 percent of its competitors.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.36 trillion of assets as of Dec. 31.
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