Saturday, May 8, 2010

Pimco’s El-Erian Says Greek Crisis Going Global

By Sree Vidya Bhaktavatsalam and Christopher Condon

May 7 (Bloomberg) -- Pacific Investment Management Co.’s Mohamed El-Erian and Loomis Sayles & Co.’s Dan Fuss said the European debt crisis may spread across the globe because of investor concern that governments have borrowed too much to revive their economies.

“After morphing into a regional dislocation, the Greek crisis is now going global,” El-Erian, the chief executive officer of Newport Beach, California-based Pimco, said yesterday in an e-mail. El-Erian shares the title of co-chief investment officer of Pimco with Bill Gross, who runs the world’s biggest bond fund.

U.S. stock markets fell again today after plunging by the most in a year yesterday on concerns that sovereign debt troubles in Europe will bring the global economic recovery to a halt. The Dow average dropped 1.2 percent at 11:39 a.m. It fell 3.2 percent yesterday after European Central Bank President Jean-Claude Trichet resisted pressure to take steps to fight the spreading crisis, and said the bank didn’t discuss buying government debt when policy makers met.

European stocks sank the most in 14 months as the Stoxx Europe 600 Index tumbled 3.9 percent to 237.19 at 4:47 p.m. in London. The gauge has retreated 8.7 percent this week, the biggest slump since November 2008.

Fuss, whose Loomis Sayles Bond Fund beat 96 percent of competitors in the past year, said the euro crisis had reached a “critical” point.

“It’s a liquidity issue, so it’s not just over there, it’s over here,” Fuss said in an interview.

The Standard & Poor’s 500 Index fell 1.4 percent to 1112.47. The euro gained 0.7 percent to $1.2702 after falling 1.5 percent yesterday.

“The transmission mechanisms for this latest round include disruptions in European inter-bank lines, a flight to quality, and market illiquidity,” El-Erian said.

Amid protests, Greece’s parliament yesterday approved austerity measures demanded by the European Union and International Monetary Fund as a condition of its 110 billion euro ($140 billion) bailout. German lawmakers today approved loans of as much as 22.4 billion euros to Greece.

The spreading contagion prompted an emergency conference call by Group of Seven finance chiefs. Kevin Rudd, Australia’s Prime Minister, said investors have judged Europe’s efforts to date as “inadequate.” U.K. Prime Minister Gordon Brown said the situation is “deteriorating.”

Europe’s debt-ridden nations have to raise almost 2 trillion euros within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Merrill Lynch data.

“The issues in Greece are a global issue,” Axel Merk, president and chief investment officer of Merk Investments LLC in Palo Alto, California, said in an interview. “The recovery priced in that access to credit is available, and cheaply.”

Italy faces the biggest bill, followed by Spain. Greece needs 152.6 billion euros, while Portugal and Ireland each have to raise about 80 billion euros, the data show.

“There may well be some defaults. If not Greece then some other nation,” said Merk, who oversees $550 million. That’s “hitting the banking sector particularly hard.”

Europe’s fiscal crisis could threaten banks in Portugal, Spain, Italy, Ireland and the U.K. as the risk of contagion grows, Moody’s Investors Service said.

“If Merkel and Trichet don’t solve this, if they don’t work together, this could potentially mean the dissolution of the euro,” Ron Sloan, chief investment officer at Atlanta-based Invesco Ltd.’s U.S. core equity team, said in a telephone interview, referring to German Chancellor Angela Merkel.

Sloan added that there is a danger the debt crisis could spread to municipal debt issued by U.S. states that are struggling to balance their budgets.

“It’s the whole issue of risk appetite again,” he said. “If the euro sinks individual U.S. states will be the next step.”

The U.S. federal deficit is forecast to reach $1.6 trillion this year, or 10.6 percent of the economy, making it the biggest by that measure since World War II. Sloan manages the $5.5 billion Invesco Charter Fund, which has outperformed 97 percent of similarly managed funds over the past five years.

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