Tags: Pimco | europe | Kashkari | europe

Pimco’s Kashkari: Expect More ‘Half Measures,’ Volatility Out of Europe

Monday, 18 Jun 2012 12:32 PM

Greeks may have elected a market-friendly parliament that will keep the euro and avoid a market-roiling exit from the eurozone for now, but Europe's inability to make lasting policy decisions will remain, says Neel Kashkari, head of global equities at bond fund Pimco.

During the weekend, conservative Greek political party New Democracy edged out leftist Syriza, the latter of which had called for an end to tough austerity measures attached to bailout money.

While a New Democracy victory reflects a broad desire among Greeks to stick with the euro, the country still faces the overall challenge of carrying too much debt and not enough growth as do other countries such as Spain and Italy.

While the European Central Bank (ECB) has taken monetary measures in the past to prop up the European economy such as making low-cost credit available to banks and other liquidity injections, fiscal authorities need to make politically tough decisions to balance spending cuts and revenue hikes to right their ailing economies.

That's not an easy task, so expect policymakers to take temporary measures to keep economies from collapsing while putting off tough fiscal decisions for another day.

"It's very easy for all of us to be critical while sitting here in America of what European policymakers are doing. As you know they are trying to achieve multiple objectives at the same time. They are trying to keep basic stability of the eurozone, but they are trying to keep pressure on the fiscal authorities to make tough choices. That forces them to make half measures," Kashkari tells CNBC.

"We are going to continue to see half measures, actions from the ECB, some fiscal actions taken but probably nothing to actually quell the crisis once and for all."

"We see two years of extreme volatility, and it's likely we are going to see extreme volatility for the near future," Kashkari says, adding Greece will likely exit the eurozone down the road anyway.

"Our base case scenario is that Greece will ultimately exit, notwithstanding the vote, we don't think the vote changes anything. Greece will ultimately exit, the question is, when does the Greek exit happen, how orderly or disorderly is it and who follows Greece out the door of the eurozone. We think the eurozone will get smaller."

Other experts agree that the Greek elections are yesterday's headlines.

"It certainly reduces the odds of a disorderly Greek exit," says Bill Stone, chief investment strategist for PNC Financial Services Group in Philadelphia, CNNMoney reports.

"[But] the Greek issues are far from over [and] the woes in the economy are far from done."

Market volatility is already following suit.

In Spain, the yield on the government's 10-year note spiked to over 7 percent on fears that despite a recent $125 billion bailout fund given to Madrid to recapitalize the country's banks, overall, Spain owes too much, and investors are demanding more in return for putting their money in the country.

Yields rise when bond prices fall, and yields rising to 7 percent tend to reflect a need for a sovereign bailout as opposed to rescue funding to prop up a banking sector.

"The solvency risk in Spain and its banking sector is likely to dominate markets as the smoke on the Greek elections clear," fixed-income analysts at Nomura Securities write in a note to clients, CNNMoney adds.

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Monday, 18 Jun 2012 12:32 PM
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