Pacific Investment Management Co.’s Mohamed El-Erian said Spain must request support from the European Central Bank to halt the contagion in the region from the rise in the nation’s bond yields.
“We need Spain to get its act together, to apply to the ECB and to get support,” El-Erian, chief executive officer of the world’s biggest manager of bond funds, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “It is important that Spain does everything it can to bring down its yields. If it doesn’t then Italian yields, which today went to 5 percent, will continue to head north.”
Spain’s 10-year yield rose 16 basis points to 5.82 percent this week. Yields have climbed about 60 basis points since falling to 5.26 percent on Oct. 19, the least since April. Italy’s 10-year debt yield rose reached 5.07 percent today, the highest since Oct. 11.
Yields on the euro-area’s most indebted nations, including Spain and Italy, had fallen since the European Central Bank unveiled its Outright Monetary Transactions bond-buying plan, known as the OMT, in September, pledging to spend as much as needed to restore confidence in government bond markets.
European Central Bank President Mario Draghi said yesterday that there would be no relaxing of the conditionality of the program, which pledges unlimited support to debt-strapped nations if they sign up to economic reforms as part of a bailout from Europe’s rescue fund.
Spanish Prime Minister Mariano Rajoy said on Nov. 6 he needs to know how much the ECB would push down Spain’s borrowing costs before his government applies for aid and signs up to the conditions attached.
“There is a lot that Europe has to do and unfortunately the time that has been bought by Mario Draghi’s very bold actions starting on July 26 -- that window -- is not being exploited enough,” El-Erian said.
Draghi vowed on July 26 to do “whatever it takes” to defend the euro, helping to stem a slide that pushed the 17-nation currency down about 6 percent since late March against its major counterparts as the region’s sovereign crisis intensified. Draghi’s comments came after Spain and Cyprus joined Greece, Ireland and Portugal in seeking bailouts.
Draghi said yesterday the economic outlook is worsening and the bank stands ready to activate its bond-purchase program if governments fulfill the necessary conditions.
Separate reports today showed industrial production slumped in France, Italy and Finland.
French industrial production shrank 2.5 percent in September from a year earlier, after declining an annual 0.9 percent in August, the national statistics office said. Factory output slid 4.8 percent in Italy and 1.7 percent in Finland.
In Italy, industrial output declined the most in five months in September, signaling the country remained mired in recession in the third quarter. Output fell 1.5 percent from August, when it rose 1.7 percent, national statistics office Istat said in Rome today.
“Europe has hit our screens again, and in a big way,” El-Erian said. “It’s not just about Spain or Greece. It’s unambiguous evidence that Germany is slowing and that France has gone into contraction.”