Tags: pimco | rally | europe | stocks

Pimco’s El-Erian: Rally From European Bailout Reform to Be Short-Lived

Friday, 29 Jun 2012 10:47 AM

Stocks worldwide rallied on news Europe took surprisingly concrete measures to battle its debt crisis, which is now more than two years old.

At a European Union summit, leaders agreed to allow rescue funds to stabilize bond markets without forcing countries in compliance with EU budget rules to accept added austerity measures.

Furthermore, policymakers allowed the continent's bailout fund, the European Stability Mechanism, to directly recapitalize banks, which won't swell national debt burdens by funneling bailout money straight to banks.

Editor's Note: Sept. 18 Cover-Up Is a Final Turning for America

EU policymakers also agreed to create a supervisory body for eurozone banks by the end of this year. But don't expect that rally to last, says Mohamed El-Erian, CEO of Pimco, manager of the world's largest bond fund.

"This is not yet the breakthrough. More is required and therefore there is a risk once again that this rally may run out of steam," El-Erian tells CNBC.

Shaky banking systems can still affect a country's sovereign creditworthiness, while commitments to broader fiscal, political and banking unions still lack details.

Furthermore, politicians may find balancing national interests with eurozone interests tough and lastly, the broader European economy needs to grow more.

"It's an important step but there's a risk that it's not enough, and we worry that investors will use this to exit rather than crowd in more private capital," El-Erian says

"That's why you are seeing a massive flow within Europe from the periphery to the core and from Europe to the rest of the world."

U.S. debt. meanwhile, remains a good safe haven, for now.

"For us, Treasurys are the cleanest dirty shirt. What you want right now as an investor is you want to be high in quality across the board, whether it's equities or bonds," El-Erian says.

"Second, you want the opportunity to pick up cheap investments, because you're going to have that opportunity going forward."

Other analysts remained skeptical of the move, pointing out recue funds pale in comparison to how much debt countries like Greece, Italy and Spain carry.

"While there may be some temporary sense of relief that the summit has not descended in to acrimonious discord, what has been thus far agreed is nothing more than sticking plaster," says Marc Ostwald, market strategist at Monument Securities, according to the Associated Press.

Editor's Note: Sept. 18 Cover-Up Is a Final Turning for America


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