Bloomberg News

El-Erian Says Bigger Losses for Greek Debtholders: Tom Keene

October 13, 2011

(Updates with El-Erian comment in second paragraph.)

Oct. 13 (Bloomberg) -- Pacific Investment Management Co. Chief Executive Officer Mohamed A. El-Erian said European leaders are beginning to recognize the need for Greek bondholders to take bigger losses than previously agreed.

“You need a significantly larger haircut because what’s being discussed now isn’t enough to put this country back on the path of fiscal sustainability,” El-Erian said today in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “We’re going to see it soon because I think the politicians and policy makers understand that debt reduction is part of the solution.”

Greece is in the process of receiving its second bailout from the European Union and International Monetary Fund as the region’s officials struggle to contain the debt crisis that has roiled world markets. Banks pledged in July to participate in a bond exchange and debt buyback program where “all instruments will be priced to produce a 21 percent net present value loss.”

“We have to deal with balance sheets everywhere,” said El-Erian, who also serves as co-chief investment officer of the world’s biggest manager of bond funds with Pimco founder Bill Gross. “We have to allocate pain after the excesses of the past.”

Investors in Greek bonds may take losses of 50 percent, Nobel economics laureate Christopher Pissarides said today in a separate interview on Bloomberg Television.

Conductor Needed

“I am very optimistic that there will be some kind of a rescue plan that will not involve a full default,” Pissarides, an economist and the first Cypriot to win the Nobel Prize, said in an interview in Seoul. “But I don’t think the haircut that has been applied so far, the discount on Greek debt, is going to be enough.”

At the same time, the IMF needs to show bolder leadership in resolving Europe’s sovereign debt crisis, in part because the U.S. is no longer strong enough to the “undisputed leader,” said El-Erian, who worked at the IMF for 15 years and served as deputy director.

The situation needs a “conductor,” El-Erian said from Pimco’s headquarters in Newport Beach, California. “The cleanest dirty shirt when it comes to global leadership is the IMF right now.”

Policy makers earlier this month pushed back a debt-crisis summit to Oct. 23, as leaders are trying to solve a crisis that started in Greece two years ago and is now threatening to tip the global economy into recession. The European Central Bank has shouldered the main burden of keeping Europe’s banking system from collapsing throughout that period, while pushing governments to take on more responsibility as leaders struggled to contain the turmoil.

--With assistance from Rose Kim in Seoul and Deirdre Bolton in New York. Editors: Dave Liedtka, Paul Cox

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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