Controls imposed in Cyprus to prevent an outflow of capital from the troubled nation are “choking the economy,” according to Pacific Investment Management Co.’s Mohamed El-Erian.
“We’re looking at a depression in Cyprus,” El-Erian, chief executive officer of the world’s largest manager of bond funds, said in a television interview on “In the Loop” with Betty Liu. “It’s not clear what the growth model for Cyprus is. It was based on offshore banking and that is now shrinking.”
Cyprus’s banks opened for the first time today in almost two weeks, with rules curbing access to cash preventing an initial panic to withdraw deposits. The Central Bank of Cyprus’s money controls include a 300-euro ($383) daily limit on withdrawals and restrictions on transfers to accounts outside the country.
Cyprus’s lenders have been closed since March 16, when the European Union presented a proposal to force losses on all depositors in exchange for a 10 billion-euro bailout. That plan touched off protests and political upheaval on the island, and was rejected by the country’s parliament. A subsequent agreement shut Cyprus Popular Bank Pcl, the second-largest lender, and imposed larger losses on uninsured depositors.
“Be careful of the euro, you’d rather be short than long at this point,” El-Erian said. “And if you are betting on equities, you’re betting on this handoff’” from central bank produced growth to real economic growth, he said.
The euro gained 0.4 percent to $1.2831, after touching $1.2751 yesterday, the lowest level since Nov. 21. The euro has fallen against a majority of its most traded peers during the past month as the turmoil in Cyprus reduced investor demand for assets denominated in the 17-nation currency.
It’s a “very historic time,” with effectively two euros, a cash versus in Cyprus and those frozen in the bank, El-Erian said in a separate radio interview on “Bloomberg Surveillance” with Tom Keene. “The euro in Cyprus is not worth what it is elsewhere” in the region, he said.
Financial markets, according to El-Erian, are in an “artificial time” due to unconventional central bank policies. Pimco, a unit of the Munich-based insurer Allianz SE, managed $2 trillion in assets as of Dec. 31.
“In order to get further growth, we need to hand off from assisted growth to real growth,” said El-Erian, who serves as co-chief investment officer with Pimco founder Bill Gross.
More Americans than projected filed applications for unemployment benefits last week, bringing a halt to the recent progress in the labor market.
First-time jobless claims rose by 16,000 to 357,000 in the week ended March 23, the highest level in more than a month, Labor Department data showed today in Washington. The median forecast of 48 economists surveyed by Bloomberg called for an increase to 340,000. The four-week average climbed from the lowest level in five years.
“The numbers were slightly disappointing,” El-Erian said. “We are sequentially healing. The corporate sector was first, then the banks and now housing. Employment is the key to the healing of households.”