Tags: El-Erian | Greece | Spain | Italy

Pimco’s El-Erian: Greece’s Survival Depends on Italy and Spain

Friday, 31 August 2012 01:12 PM

Greece is working to push through required economic reforms in exchange for bailout assistance, though the country may want to look to the larger Italy and Spain as a weather vane, said Mohamed El-Erian, CEO of Pimco, manager of the world’s largest bond fund.

Greece has accepted a sovereign bailout and even renegotiated lending terms with private creditors, and today, the country is working on enacting austerity measures in compliance with the European Central Bank, the European Commission and the International Monetary Fund, often referred to as the Troika.

Greece continues to struggle with too much debt, too little growth and a lack of confidence in the country’s political parties to overhaul the economy and get it moving again.

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The country should keep working with policymakers, but also keep an eye on the larger Spain and Italy.

“[I]t is not all about internal challenges. Greece’s continued membership of the eurozone depends also on the evolution of the situation in Italy and Spain — two countries that will have an important impact on what the Greek reset looks like and when it would occur,” El-Erian wrote in a CNBC guest blog.

“If the situation in Italy and Spain were to deteriorate further, Greece would get even less sympathy from the Troika; and certainly less money.”

Yields of Spanish and Italian government debt auctions have soared in recent months, in Spain especially, namely on fears that the countries will seek a sovereign bailout.

Spain recently secured roughly $125 billion in rescue funding to recapitalize its banks and prop up regional governments, though the country is widely expected to seek a lifeline for the country itself.

That could involve a European decision to use all its resource to keep Spain and Italy in and push Greece out of the currency zone, as even though the country may have restructured debt with private creditors, official default remains a possibility, he noted.

“Greece’s future thus depends on the outcome of both domestic events and developments in Italy and Spain. Greek officials should certainly hope that collective European action will succeed in stabilizing these other two countries’ economies. But they should also realize that too great a success could, ironically, map into a higher probability of a ‘Grexit,’” El-Erian wrote.

“It could well be that continued muddle through for the eurozone as a whole, rather than full resolution or fragmentation, is what would deliver the most official support for Greece. This may be attractive for the current Greek government. It certainly won’t be for the rest of the eurozone.”

Inspectors are due to arrive in Greece to gauge the country’s progress in pushing through austerity measures to pay down debts and narrow deficits.

Should Troika officials determine the country is making progress, it will disburse the country $39.4 billion in payment from rescue facilities.

The International Monetary Fund has said it has faith Greece is making progress.

“The IMF is supporting Greece, has been supporting Greece and continues to support Greece in its efforts to overcome the economic crisis,” IMF spokesman Gerry Rice said in a regularly scheduled news briefing, according to the AFP newswire.

“And that’s again precisely what the mission will be discussing with the Greek authorities.”

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Friday, 31 August 2012 01:12 PM
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