Bloomberg News

Spanish Yields Show Summit Shortfall, El-Erian Says: Tom Keene

July 09, 2012

PIMCO CEO Mohamed El-Erian

Pacific Investment Management Co. (PIMCO) Chief Executive Officer Mohamed El-Erian. Photographer: T.J. Kirkpatrick/Bloomberg

Spanish bond yields at levels that have prompted bailouts signal last month’s European summit wasn’t enough to stem the region’s debt crisis, according to Pacific Investment Management Co.’s Mohamed El-Erian.

Yields on Spanish debt due in 10 years rose to more than 7 percent today, corresponding to interest rates that spurred Greece, Portugal and Ireland to seek emergency loans. The difference in yield between the securities and similar-maturity German bunds climbed 10 basis points to 573 basis points, within 16 basis points of the record level set June 18.

“It signals that people have understood that while the last European summit did lot, it didn’t do enough,” El-Erian, the chief executive officer of the world’s largest manager of bond funds, said in an interview on Bloomberg Radio “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “It didn’t break the link between weak banks and weak sovereign credit worthiness. It hasn’t increased the resources of the ESM and it hasn’t overcome national politics.”

European Union leaders agreed at the June summit to ease the way to direct financing for troubled banks, to start work on Europe-wide bank supervision and to increase access to the EU’s bailout mechanisms. Finance ministers have been asked to hammer out the details.

Among the issues finance ministers will have to tackle today is how to start funneling as much as 100 billion euros ($123 billion) in aid to troubled Spanish banks without boosting the government’s debt load. Ministers are likely to initially channel the money via a Spanish state agency because the 500 billion-euro European Stability Mechanism won’t be operational until a still-unspecified date in the summer, an EU official told reporters in Brussels on July 6 on condition of anonymity.

Sovereign Favorites

More easing from the European Central Bank alone won’t solve the euro-region’s crisis, El-Erian said. The central bank’s balance sheet, with 3.1 trillion euros in assets, has increased to about 30 percent of gross domestic product, compared with about 20 percent of GDP at the U.S.’s Federal Reserve, he said.

“There are those who feel it should do more, and I think that’s right provided the fiscal authorities and the political authorities move as well,” he said. “The problem with central bank action, whether it’s in Europe or the U.S., is it can only provide a bridge given the problems we have. It is not a solution.”

El-Erian reiterated that Pimco favors the sovereign debt of nations including the U.S., Mexico and Brazil.

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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