El-Erian Says IMF to Aid Greece After ‘Chicken’ Game (Update1)
March 18, 2010, 12:37 PM EDT(Adds quote from El-Erian from sixth paragraph.)
By Cordell Eddings and Thomas R. Keene
March 18 (Bloomberg) -- The International Monetary Fund will come to the rescue of debt-strapped Greece after a “game of chicken,” according to Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co.
“The IMF will come in, but it’s going to be a bumpy process,” said El-Erian, who is also chief executive officer of Newport Beach, California-based Pacific Investment Management Co., in an interview on Bloomberg Radio. “There is no immediate solution. Don’t underestimate the game of chicken between Greece, the EU and the IMF.”
Greece’s Prime Minister George Papandreou set a one-week deadline for the European Union to craft a financial aid mechanism for Greece, challenging Germany to give up its doubts about a rescue package.
Greece, which had the European Union’s widest budget deficit at 12.7 percent of output last year, has struggled to convince investors it can bring the shortfall within the bloc’s limit of 3 percent.
Papandreou said he may turn to the IMF to overcome Greece’s debt crisis unless EU leaders agree to set up a lending facility at a summit March 25-26. The IMF option has been dismissed by European Central Bank President Jean-Claude Trichet and French President Nicolas Sarkozy, who say it would show the EU can’t solve its own crises.
‘Complicated Process’
“Europe cannot come up with the financing that Greece needs and Europe cannot impose conditionality on Greece,” El Erian said. “We have seen the movie over and over again where a country runs into a fiscal issue. The key thing for investors is to not to rush in on the first evidence of anything, but to wait. This is a very complicated process of bringing together enough domestic support for a meaningful adjustment process and financing.”
German Chancellor Angela Merkel, who says Greece won’t need a bailout, told parliament in Berlin yesterday that in the absence of a European lender of last resort, calling in the IMF “would probably have to be the way out right now if action were to be taken.”
German 10-year government bonds were little changed today after four days of gains as investors sought the safest euro- denominated assets. The yield on the security earlier dropped as much as two basis points, or 0.02 percentage point, to 3.09 percent before trading at 3.12 percent.
Countries with Aaa sovereign ratings aren’t under immediate risk of losing that status and only an inability to reverse fiscal erosion would prompt a reduction, according to Moody’s Investors Service.
‘Sharp Increase’
Among the biggest countries with Aaa sovereign ratings, the U.S. and U.K. face greater threats to their ratings than France and Germany, which have relied less on the government to fuel their economies, Moody’s said in a conference call with investors on March 16.
The risk to ratings comes amid an economic recession that began in December 2007 and the worst decline since the Great Depression. The U.S. and U.K. sought to counter the effects through government-funded stimulus, and each spend about 7 percent of revenue servicing debt in 2010, assuming a moderate recovery, Moody’s said.
“There has been a very sharp increase in debt to GDP in the United States -- over 20 percentage points” El-Erian said. “That was unthinkable. What Moody’s is saying is that unless we see a credible medium term fiscal adjustment program there is a risk debt indicators will get to a level that is incompatible with as Aaa rating.”
The U.S. budget deficit widened to a record $221 billion in February as the government boosted spending to help revive the economy. Treasury Department figures show the deficit this year will likely surpass the record $1.4 trillion in the fiscal year that ended in September.
Total Return Fund
Pimco’s Bill Gross, who runs the world’s biggest bond fund at Newport Beach, California-based Pimco, has increased holdings of bonds from non-U.S. developed nations for a fourth month, taking them to the highest level since May 2004.
Gross raised the proportion of the securities in the Total Return Fund to 19 percent of assets in February from 18 percent in January, according to a report placed on the company’s Web site yesterday. He increased U.S. government debt to 35 percent from 31 percent, the first increase since October 2009, and lowered net cash to 2 percent from 9 percent.
--Editors: Dennis Fitzgerald, James Holloway
To contact the reporters on this story: Thomas R. Keene in New York at tkeene@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net.
