Europe’s fiscal crisis is getting worse and will keeping fueling market instability, according to Pacific Investment Management Co.’sMohamed A. El-Erian.
“The problems in Europe are getting bigger,” El-Erian, co-chief investment officer at the world’s biggest bond fund, said on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays as he prepared to speak before the Federal Reserve Bank of St. Louis. “Europe has a debt issue and Europe has a growth issue, and until Europe deals with both, we are going to have these reoccurring periods of nervousness in the market.”
Yields (GSPG10YR) on Spanish bonds rose this week to the highest level since December and those on Italian notes advanced to the most since February. Those yields fell today as European Central Bank Executive Board member Benoit Coeure triggered speculation that the bank will revive its bond-purchase program to lower Spain’s borrowing costs.
“Spain shows the markets remain nervous,” Coeure said at an event in Paris today. “Will the ECB intervene? We have an instrument, the securities markets program, which hasn’t been used recently but it still exists.”
The Standard & Poor’s 500 Index (SPX) gained 0.7 percent today after falling 4.3 percent in the five days ended yesterday partly on concern Europe’s economic recovery is stalling.
“People are realizing that the tranquility that we have is bought rather than earned,” El-Erian said. “It depends on the ECB putting in liquidity in order to calm markets. At the first indication that the ECB may not be committed to this, people get really nervous.”
Investors should avoid the bonds of Greece (GGGB10YR) and Portugal, he said, adding that Italy and Spain are more attractive because they don’t have a solvency issue.
Amid challenges, Europe is still very important to the rest of the world, El-Erian said.
“No single country in the world can totally decouple from Europe,” he said, adding that Europe is the biggest economic zone in the world and the region’s banks are global and have a huge influence on risk appetite.
El-Erian is speaking today in the St. Louis Fed’s Homer Jones Memorial Lecture on central bank policy activism. Fifteen of the 21 primary dealers that trade with the central bank said the odds are that it will need a third round of bond purchases, or quantitative easing, to bolster the U.S. economy, according to a Bloomberg News survey conducted in the week of March 26.
Pimco’s Total Return Fund (PTTRX:US) has returned 6.46 percent in the past year, beating 44 percent of its peers, according to data compiled by Bloomberg. It gained 0.57 percent over the past month, outperforming 93 percent.
To contact the reporters on this story: Susanne Walker in New York at firstname.lastname@example.org; Kathleen Hays in New York at email@example.com
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