Bloomberg News

Greece Resolution Risks Wider Contamination, El-Erian Says

June 23, 2011

(Updates with El-Erian comments in the second paragraph.)

June 23 (Bloomberg) --European leaders’ efforts to resolve Greece’s crisis risk contaminating the entire system because they don’t address the nation’s inability to pay its debts, said Pacific Investment Management Co.’s Mohamed El-Erian.

Officials are treating the country’s problem as a liquidity issue rather than addressing the conditions behind the crisis, El-Erian, chief executive officer of Pimco, said in a Bloomberg Television interview on “In the Loop” with Betty Liu.

“Greece has two fundamental issues: it has too much debt, and it cannot grow enough,” El-Erian said from Newport Beach, California. “Recognize that the problem is a solvency issue, address it, and then try to safeguard other parts to minimize fundamental contagion.”

Greece’s debt reached 143 percent of gross domestic product last year.

The European Central Bank and Germany have clashed over how much bondholders should share in the burden of a Greek rescue. The German government argued for requiring an extension of Greek bonds’ maturities, while the ECB said it opposed anything that could be interpreted as a default. German Chancellor Angela Merkel retreated last week, saying she’d still like voluntary investor participation.

“What Europe should be doing and working very hard at is minimizing fundamental contagion,” El-Erian said.

Austerity Package

European finance ministers are holding off on a 12 billion- euro ($17 billion) payment to the country for July under last year’s rescue until new austerity measures are taken. While Greek Prime Minister George Papandreou won a vote of confidence June 21, he must still secure parliamentary approval of a 78 billion-euro package of budget cuts and state asset sales.

Euro-area finance chiefs will decide on July 3 whether Greece has met conditions for its next aid payment.

The euro weakened to a record versus the Swiss currency today, depreciating as much as 1.7 percent to 1.1846 francs. It declined 1.2 percent to $1.4190.

The yield difference, or spread, between 10-year German bunds and Greek securities of a similar maturity was 14 percentage points today, down from 15 a week ago.

“The critical thing is not to contaminate the whole system, and that’s what we’re risking day in and day out if we continue with a liquidity approach for a solvency issue,” El- Erian said.

--With assistance from Jeff Black in Frankfurt and Gabi Thesing in London. Editors: Greg Storey, Dave Liedtka

To contact the reporters on this story: John Detrixhe in New York at; Betty Liu in New York at

To contact the editor responsible for this story: Dave Liedtka at

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