Bloomberg News

Euro Debt ‘Toxic’ Amid Fiscal Crisis, Pimco’s Crescenzi Says

December 30, 2011

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Dec. 29 (Bloomberg) -- European sovereign debt has just about the same status that was bestowed on subprime mortgage bonds during the depths of the financial crisis, according to Pacific Investment Management Co.’s Anthony Crescenzi.

“It’s almost like 2008, when in the United States banks and investors didn’t want to be seen as having holdings, or known to have holdings, in subprime mortgages and other so- called toxic assets,” Crescenzi, executive vice president at Pimco, said in an interview today on Bloomberg Radio’s “On the Economy” with Sara Eisen. The company, based in Newport Beach, California, operates the world’s biggest bond fund.

Italian government securities have lost 5.7 percent this year, compared with a 9.6 percent return on America’s Treasuries, a three-year high, according to Bank of America Merrill Lynch bond indexes.

Euro-area nations agreed at a summit this month on automatic sanctions for members that breach deficit limits, though how the penalties will work hasn’t been decided, and also supported bringing forward to mid-2012 the start of a permanent rescue fund. German Chancellor Angela Merkel resisted a push by French President Nicolas Sarkozy for the European Central Bank to step up purchases of public debt.

‘Signing a Prenup’

“What Europe is trying to do is form a union, a marriage, a fiscal union in a year,” said Crescenzi, 47. “You could say they’re signing a prenup,” he said, referring to a contract between spouses on how financial affairs are to be handled during their marriage and in the event of a divorce. “There’s still a lack of clarity about whether they’ll actually get to the altar and form this union.”

The euro fell today to a 10-year low against the yen and Italy’s 10-year bond yields increased to above 7 percent after the Rome-based Treasury sold less than its maximum target at a bond auction.

The 17-nation currency tumbled yesterday as the ECB’s balance sheet soared to a record 2.73 trillion euros ($3.55 trillion) after it loaned financial institutions more money last week to keep credit flowing during the debt crisis.

“They’re trying to find ways to support the banking system,” according to Crescenzi, who said the ECB is unlikely to follow the example of the Federal Reserve’s bond purchases known as quantitative easing.

--Editors: Dennis Fitzgerald, Greg Storey

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Sara Eisen in New York at seisen2@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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