European leaders are coping with a monetary union that was created without an “exit strategy” as member nations try to resolve the region’s debt crisis, Pacific Investment Management Co.’s Richard Clarida said.
“The challenge in Europe is that the euro was created without an exit mechanism,” said Clarida, a strategic adviser at the world’s biggest bond fund manager, during a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “They’re having to develop this on the fly.”
European Union leaders pledged today at a two-day summit in Brussels to stand behind Greece should Prime Minister George Papandreou push through budget cuts, attempting to prevent the Mediterranean nation from defaulting on its obligations and to shore up support for the shared currency. Greece’s adoption of the euro prevents it from devaluing its currency to reduce its debts and boost exports.
The plan hinges on Papandreou’s ability to shepherd 78 billion euros ($111 billion) of austerity measures through parliament. The program was endorsed yesterday by experts from the European Commission, the European Central Bank and the International Monetary Fund.
Portugal and Ireland followed Greece in requesting international aid. A year after approving a 110 billion-euro bailout for Greece, European leaders and the IMF are working on a second funding package. Bond yields show the bailout measures in those countries may have had limited success, Clarida said.
“You have three countries that are essentially on life support,” Clarida said. “Those wide spreads are indicative that even these programs that are in place now may not be sufficient.”
Five-year Irish government securities yield 11.6 percentage points more than similar-maturity German bunds, from 5.8 percentage points in February, while those of Portugal pay a spread of 11.8 percentage points, up from 3.5 percentage points in January.
The euro fell 0.7 percent to 1.1871 Swiss francs, after reaching a record-low 1.1846 yesterday. The euro weakened 0.5 percent to $1.4189 at 12:26 p.m. in New York, from $1.4256.