The European Union is still struggling to find a long-term strategy to deal with the crisis that has befallen its common currency. SPIEGEL spoke to Pimco CEO Mohamed El-Erian about how Greece can get back on its feet, the fine line Germany is treading and why the US, despite high debt, is in better shape.
SPIEGEL: Mr. El-Erian, Pimco is the world's largest bond investor, with over $1 trillion in assets. A lot of that money is invested in government bonds. Are you an unflinching optimist?
El-Erian: When investors from all over the world entrust us with their savings and retirement funds, they rightly expect us to manage risk and look for opportunities all over the world. There are some very healthy countries that are running surpluses and are net creditors. But then we have certain other countries that have suffered a severe shock to their public finances and now face sovereign risk issues.
SPIEGEL: We can think of quite a few of those. The United States, for example, as well as many European countries ...
El-Erian: The US is today running a budget deficit of 10 percent of gross domestic product and has seen its debt-to-GDP ratio soar by 20 percentage points in under two years, which is unprecedented during peacetime. At the same time, the US still benefits from being the provider of the world's reserve currency and the deepest and most liquid financial markets. In Europe, some countries, such as Greece, have a public debt crisis because of fiscal imprudence. Others, like Ireland, face challenges because they used the public sector balance sheet to assume someone else's debt, namely that of the banks.
SPIEGEL: Pimco is in regular contact with governments around the world. How would you advise, for example, a Spanish finance minister?
El-Erian: I think it was my colleagues in London who met with him and his delegation, and they did so at the request of the Spanish authorities.
SPIEGEL: How many finance ministers have called you recently?
El-Erian: Some do, as do some central bankers from around the world. The typical question we get asked is this: "What does it take for Pimco to make long-term investments in our country." The answer is always the same: an outlook of high and sustainable growth.
SPIEGEL: And your people then tell the Spanish finance minister: "Sorry, but your bonds are too risky for us."
El-Erian: We are very cautious about exposures to Greece and Ireland. Spain is under more active discussion, with a lot depending on how they deal with the problem of the cajas (savings banks).
SPIEGEL: Will countries like Greece actually be able to pay back their debts?
El-Erian: Countries like Greece have to deal with their debt overhang, and they must do so in a timely manner. They face the typical debt trap: a situation where the existing stock of debt is so large that new investors are discouraged from coming into the country with new funds. It's like having a very large, dark storm cloud hanging outside your house. You will not go out; you will wait until it passes. I remember how I reacted to the announcement of Greece's rescue package almost a year ago. Having worked at the International Monetary Fund (IMF) for 15 years, I had never seen as ambitious a fiscal adjustment program as what the Greek government is trying to do. However, even if they delivered on this adjustment, their debt to GDP would go up from 114 percent of GDP to almost 150 percent. This is what a debt trap looks like. At 150 percent, the stock of debt chokes growth and employment. And if you don't have growth and employment, the population will not be able to sustain this.
SPIEGEL: Are you expecting a haircut for Greece, a forced elimination of some of its debt?
El-Erian: Right now we do not think that Greece has in place a policy approach that allows it to deliver high growth and overcome its debt overhang. What we're waiting for is a stronger response that goes from liquidity support to both liquidity and solvency support. Then there would be many possibilities. Read more.
