INTERNATIONAL. European policy makers need to quickly address the worsening sovereign-debt crisis in Greece, Italy and Spain before it becomes a greater threat to the eurozone’s integrity, according to Pacific Investment Management Co.’s Mohamed A. El-Erian.
“They’re looking for an immaculate solution,” El-Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “There are no immaculate solutions. You have to work hard at getting this right, and you have to address two very distinct issues: very high debt stocks and an inability to grow.”
Italian and Spanish sovereign bonds are trading like junk- rated debt amid faltering efforts by European Union finance ministers to contain the debt crisis to the three already-bailed out nations. Italy’s 10-year borrowing costs surged to 6.02% today, the highest since the introduction of the euro, while Spanish notes exceeded 6% for a second day since they last breached that level in November 1997. Both reversed losses on speculation the European Central Bank bought the debt to stem the decline.
The slowness of the response to the Greek debt crisis, and the inability to resolve the problem since the initial attempt by policy makers with a almost US$1 trillion program of bond purchases in May 2010, has allowed problems to fester and expand in a region where economies are tightly linked, El-Erian said.
The big danger is that “a deterioration in Italy gets translated into contagion to Spain and suddenly a peripheral debt crisis is much, much bigger and threatens the integrity of the eurozone,” El-Erian said. “That’s why it’s so critical for the Italians and the Europeans to move quickly.”
The global economy needs policy makers in two of three major economies, the U.S., Europe and China, to produce “grand bargains” to spur growth and generate a sustainable period of expansion, El-Erian said.
The U.S. must realize that not addressing its structural problems is impeding growth, Europe needs to improve the effectiveness of its policies and China needs to “unleash the consumer,” El-Erian said.
“So far we are not seeing the sort of leadership that’s required to deliver these bargains,” El-Erian said. “As long as that’s lacking, the global economy’s going to hobble along and we’re going to have these isolated crises.”
The status of the U.S. as the center of the global financial system is also being threatened as President Barack Obama and Republicans in Congress struggle to reach an agreement to increase the $14.3 trillion debt ceiling by the Aug. 2 deadline when the U.S. runs out of the ability to borrow, El- Erian said.
“The U.S. is at the core of the global system,” El-Erian said. “We have to maintain a triple-A standing to stay at the core of the system. When other countries start seeing these debates on the debt issue, start seeing growth stagnate, start seeing unemployment remain stubbornly high, they get concerned because they have outsourced to us the reserve currency status and they have outsourced financial intermediation.”
Recent data has suggested the pace of growth is slower than policy makers and most economists have forecast, El-Erian said. With the trade deficit in the U.S. unexpectedly widening in May to US$50.2 billion, the highest level in almost three years, “you’re going to have people scrambling to revise downward second quarter” growth forecasts, he said.