Pimco willing to bet Greece takes euro 'sabbatical'
Shanny Basar in New York
08 Oct 2010
Mohamed El-Erian, chief executive and co-chief investment officer of fixed income fund manager Pimco, has said he is willing to bet that Greece would take a sabbatical from the Euro within three years.
Speaking in an interview with Matthew Bishop, American editor and New York bureau chief of The Economist, the head of one of the world's largest bond funds, said: "
I am willing to bet that Greece will take a sabbatical from the Euro...the rest of Europe does not look that bad.”
But he warned that in America the next economic dislocation would come from the States, which may require a Federal bailout, that there is a 30% chance of a US double-dip recession and just a 15% probability of a cyclical recovery and growth of between 4% and 5%.
El-Erian warned that if the US economy suffers a double-dip this will affect developing economies, which are five years away from developing sufficient domestic consumer demand to maintain their growth rates.
He said: “We used to have a plane that was driven by one engine, the US, and fuelled by debt which flew really well until the fuel ran out. We are moving to a plane with multiple engines with good fuel and more stability but in the meantime we need to navigate that bumpy journey.”
He described the US economy as a rocket trying to reach escape velocity, but facing massive gravitational forces in the form of high unemployment and a dragging housing market. "It needs to reach critical mass to obtain escape velocity," he said.
El-Erian predicted that the next stage of economic dislocation in the US will be at the state level. He said: “States have made a host of promises they cannot maintain so will either have to change them now, which is the
Margaret Thatcher outcome, or eventually be bailed out by the Federal government, who will have to decide where to draw the line.”
He said he did not think the US was in the same position as Greece. He said: “Washington is not Athens on the Potomac. The US supplies a global currency and a global financial system so does not have the same problems as Greece, but if the US does not behave over the next five years investors could lose confidence.”
However, El-Erian warned that he saw a lot of structural debt reduction programmes when working at the IMF, but none were on the scale required in Greece.
El-Erian said: “The relationship (between Greece and Germany) is like a rich parent and misbehaving children. Germany faces the dilemma of deciding how long to give them a chance and it is easy to be patient if Greece delivers on its promises.”
Pimco does not own any Greek government bonds. The fund manager made a similar same decision in 2000 when it decided not to hold any Argentinian sovereign debt. He said: “Argentina was depending on an immaculate recovery and it is not responsible to invest in a country with that strategy.”
At the beginning of last year Pimco began to develop the term "New Normal" to describe a new world with years of low growth, high unemployment, and increased regulation in the west and a migration of wealth to developing economies.
It is now developing a “New Normal 2.0” for a world that is unusually uncertain.
(efinancialnews.com)
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Pimco e la Grecia ... tra qualche anno vedremo.
