Greek program
needs redesigning, says PIMCO CEO
By Tom Ellis
Greece should take up the issue of separating the 50 billion euros that went
toward recapitalizing the country’s banks from the country’s public debt with
its European partners and the International Monetary Fund, says Mohamed
El-Erian, chief executive officer of PIMCO -- one of the world’s largest bond
investors -- although he admits it will be a hard sell. He also notes that the
markets are still anticipating a Greek euro exit.
What does the recent
decision of the EU summit regarding the banking system mean for the eurozone and
Greece?
European leaders took three important steps at their summit
last week toward the policy breakthrough that has been eluding them since the
onset of the regional debt crisis almost three years ago.
First, they
clearly defined the structural initiative that, together with monetary union,
can place the eurozone on a solid footing: fiscal union, banking union and
greater political integration. Second, they enhanced the flexibility of the
regional firewalls, including expanding the scope of the European Stability
Mechanism (ESM) to break the disruptive feedback loop between weak banks and
deteriorating sovereign creditworthiness. And third, they agreed to a regional
growth initiative that, at the margin, can help countries strike a better policy
mix.
This is all good news. But it is not yet the decisive regional
policy breakthrough that is urgently required. The implementation timetable is
too stretched, national political differences are already surfacing, and the
funding of the emergency funding mechanisms is too limited while the procedures
are too cumbersome.
Was this the critical turning point for the
eurozone?
Because of these limitations, more progress is required
before one can declare with a sufficient degree of confidence that Europe has
reached a turning point. The limitations also suggest that the immediate impact
on the outlook for Greece will be limited. Indeed, here the issue is much more
immediate and it boils down to the upcoming negotiations between the new
government and the troika. And they will be far from easy.
Which
points do you find the most difficult?
As the assumptions
underpinning the prior agreement have been overtaken by unfavorable economic and
financial developments, a program redesign is necessary and, indeed, overdue.
Among the many uncertainties, it is not clear as yet who would put up the money
to compensate both for the slippage in initial program assumptions and for the
new government’s electoral commitment to stretch out the pace of domestic
economic adjustment.
Could this decision also be applied to Greece
with respect to the 50 billion euros that went toward the recapitalization of
the country’s banks?
That is an issue that the Greek government
should take up with its European partners and the IMF. I suspect that it may
prove hard to change, but it is definitely worth putting on the
table.
Should the ESM be able to buy the bonds of indebted countries
such as Greece?
It is crucial for Europe to quickly break three
unfavorable feedback loops: that between weak banks and deteriorating sovereign
creditworthiness, that between bad politics and bad economics, and finally, that
of economic contagion.
After the private sector involvement deal,
should there be a haircut on the debt held by the official sector (ECB, eurozone
countries)?
The reality is that, already, the official sector is
lending money to Greece in order for the country to meet the debt service
obligations on both multilateral and bilateral government debt. It is up to the
official creditors to decide whether they wish to continue with this approach or
opt for a more explicit OSI, or official sector involvement. Given their
concerns about precedents, I suspect that they would prefer to continue as is
for quite a while rather than agree to a haircut.
After all is said
and done, do you think the Greek debt is sustainable?
I think that
Greece will require additional debt relief. It is not just an issue of
debt-servicing obligations. It is also about removing the debt overhang that
discourages the level and type of long-term private capital inflows that are
essential for growth, job creation and investment.
Do the markets see
Greece remaining in the euro?
Markets remain very concerned about a
Greek exit. While recognizing that an exit would involve significant upfront
costs and disruptions, many see it as part of Greece being able to offer its
citizens a light at the end of a very long austerity
tunnel. |
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