Tags: Pimco | Greece | Default | 2013 | Debts | Remain

Pimco: Greece Likely to Default by 2013 as Debts Remain

Tuesday, 26 October 2010 07:24 AM

Greece is likely to default over the next three years because budget-cutting won’t be enough to reduce the nation’s debt burden, Pacific Investment Management Co. Chief Executive Officer Mohamed A. El-Erian said.

It’s in Greece’s interest to default “as long as you can contain the contagion to other countries and it is done through orderly restructuring and repricing to retain competitiveness,” El-Erian said at a conference sponsored by the Economist magazine in New York yesterday. Like Latin America’s “lost decade” in the 1980s, “the alternative doesn’t promise growth and employment generation,” he said.

The extra yield, or spread, investors demand to hold Greek debt instead of similar-maturity German bonds jumped to a two-week high today. The European Union and International Monetary Fund approved a 110 billion-euro ($153 billion) aid package on May 2 in exchange for Greece agreeing to cut public-sector wages and pensions and raise taxes on fuel, alcohol and cigarettes.

“Greek bonds have been under pressure since El-Erian’s comments,” said Orlando Green, assistant director of capital- markets strategy at Credit Agricole Corporate & Investment Bank in London. “The near-term picture doesn’t look so bad for Greece, but it’s a long journey ahead.”

Europe’s sovereign-debt crisis erupted at the end of 2009 after Greece’s newly elected socialist government said the budget deficit was twice as big as the previous administration disclosed. Irish, Portuguese and Spanish bonds slumped on concern that Greece’s crisis would be followed by other fiscal problems on Europe’s periphery.

‘Heroic’ Target

The Bank of Greece today said the nation must push ahead with its deficit-reduction plan. “Fiscal consolidation must now move at a much faster pace, with drastic limitation in public- sector waste,” the central bank said in an e-mailed report.

Prime Minister George Papandreou has promised austerity measures amounting to 11 percent of gross domestic product, according to IMF data.

“I have never seen an 11 percent adjustment on the fiscal side being delivered” under the current program’s assumptions, said El-Erian, who worked at the IMF for 15 years. “Eleven percent is heroic.”

Greek bonds slid today, pushing the 10-year yield up 30 basis points to 9.65 percent at 10:55 a.m. in London.

Investors demand 717 basis points, or 7.2 percent, more yield to hold 10-year Greek bonds than they do to hold benchmark German bunds. That spread jumped above 700 basis points today for the first time since Oct. 8.

Default Swaps

Credit-default swaps protecting Greek government bonds for five years cost 668.5 basis points, according to CMA in London today. Swap prices surged before the May rescue plan and had eased since then, suggesting Papandreou’s austerity measures had bought the country time to reduce a budget deficit that’s more than four times the European Union’s limit.

The EU estimated Greece’s 2009 deficit at 13.6 percent of gross domestic product, the bloc’s highest after Ireland, and projects a shortfall this year of 7.8 percent of GDP.

“The fiscal adjustment that Greece needs to do is unprecedented,” Giada Giani, senior European economist at Citigroup Inc., said at a conference in Brussels today. “There is a limit to the amount of fiscal tightening a country can bear and support without the tightening becoming self-defeating, so detrimental for economic growth that it doesn’t really deliver an improvement.”

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Greece is likely to default over the next three years because budget-cutting won t be enough to reduce the nation s debt burden, Pacific Investment Management Co. Chief Executive Officer Mohamed A. El-Erian said. It s in Greece s interest to default as long as you can...
Tuesday, 26 October 2010 07:24 AM
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