June 29th, 2011
03:31 PM ET

PIMCO CEO on debt in the U.S. and Greece

Will Greece default? Will Portugal, Italy, Spain and other nations fall like dominoes if Greece does? Does it matter? And how about the United States? We don't really risk default, do we?

I talked to a man who should know: Mohamed El-Erian, the CEO of PIMCO, the world's biggest bond trader. He's also written a superb book called When Markets Collide. Here's a transcript of our conversation from Sunday.

Fareed Zakaria: For a long time, the Europeans have tried to find some way that they could kick the can down the road, that they could provide some kind of assistance because I think they fear a Lehman-like event where if Greece falls, it causes a kind of shock to the markets? Is it inevitable that Greece will default? 

Mohamed El-Erian: It is inevitable that Greece would have to restructure its debt. And you're absolutely right. Europe has been kicking the can down the road treating Greek's problem not as a solvency issue but as a liquidity problem.

I don't like the analogy of kicking the can down the road. I prefer a better one, Fareed. Think of rolling a snowball down a hill. Two things happen when you do that. First, the snowball - or in this case the problem - gets bigger. And secondly, the dynamics start accelerating and becoming more disorderly. And that's exactly what's happening in Greece.

Greece has two problems. It has too much debt and it cannot grow. And until these problems are solved, more and more of Europe is going to be contaminated. We had a massive bailout a year ago in Greece - massive. A year later, every single indicator in Greece is worse off.

A substantial part of that reason, is that it has had to adopt policies of austerity. Cutting spending, raising taxes, and that when you do it in a fragile economy, of course, you're taking money out of the economy. The government isn't spending on all the things it used to; it's firing people rather than hiring people; all that has a downward spiral effect on demand and the economy. 

Does that mean in the U.S. as we think about these issues of should we have another stimulus, should we start cutting the budget - is the lesson that while the U.S. economy is fragile, don't cut budgets substantially? 

The United States is fundamentally different from Greece in a number of respects. First, it has a lot more time. Because the U.S. supplies the global public goods. It supplies the dollar as a reserve currency. It supplies the deepest markets, financial markets, which means that other countries are willing to outsource the savings. This gives the U.S. much more time to deal with its fiscal policy issues.

The second issue is that the U.S. actually is a much more vibrant economy. The problems facing the U.S. are not an engineering issue as much as a political issue.

You need political will - you need the Democrats and the Republicans to come together to deal with four structural impediments - and they should be able to do that over time.

So when we look at the U.S., yes, there was a public finance issue, but it's certainly nothing like Greece.

So when PIMCO looks at this situation, do you - are you short of U.S. treasuries? Are you selling U.S. treasuries because you worry that the U.S. does not have the political will?

As you say, in our case, there are many solutions. I mean Greece's case, there really isn't a solution - there isn't a good solution. We have many solutions, just no political will, at least, nor apparent political will to deal with it. 

Does that make you despair enough that you guys are selling U.S treasuries? 

We find better value in government bonds outside the U.S. right now, so it's an issue of valuation. You should buy or sell based on price. U.S. bonds have benefited enormously from the Federal Reserve buying them under the QE-2 program, which ends at the end of June.

Put another way, the Fed has been buying about 70 percent of how much of treasury issues. A basic rule as an investor is don't buy something unless you know who else is going to be buying. So when we look at treasuries, we see the big buyer stepping away from the market for certain. And we ask the question who else is going to be buying at these levels and we can't identify another buyer of the size of the Fed.

How much time do you think the U.S. has to put its house in order?

I think the U.S. - in terms of immediate valuations - I think the end of the QE-2 program is a major event that the market is underestimating. Longer term, I think we have two to three years.

Fareed, as an investor, it's very important to recognize what your alarm clock is.

You know, all  of us would like to wake up just as the alarm clock is going off, but a lot of us cannot. A lot of us have type one and type two errors.

Type one is you wake up before your alarm clock and you just sit there and you're early, but at least you don't miss the alarm clock.

The other alternative is you oversleep and you sleep through your alarm clock. Our preference has always been wake up earlier than later.

Do you think that a default, even if it is temporary and does a six-month extension, but an actual default on the debt limit would be a big event for the markets? 

It would be and simply because of the technical linkages. So if the U.S. would not only fail to get agreement on the debt ceiling, but end up cutting more than just expenditures on transfers and expenditures on federal workers, but actually not meet a debt payment, then we would be in the land of the unpredictable.

So your advice to the American political system would be, "Do not play with this issue"?

My advice is please try and get together and solve this issue in the context of a medium term reform package.

Post by:
Topics: Economy • Europe • United States

soundoff (42 Responses)
  1. j. von hettlingen

    "Greece has two problems. It has too much debt and it cannot grow."
    There is another problem as well – the haves and don't haves in Greece find a scape-goat for their misery and are not willing to support the government's austeriy measures. The haves complain about having over 1 million of publicly employed in a country, that has only11 millions and they are not willing to support the bloated government, which is keeping a bunch of good-for-nothings busy.
    Those who are in the public services complain about their pay cuts. A lawyer earns €500/month and has to live on this salary, while costs of living are soaring.
    The haves dine and wine on their yachts. They don't have to worry about any tax surge, as they had already taken their money out of the country.

    June 29, 2011 at 4:15 pm | Reply
    • Johnny

      LOL. It's "haves" and "have nots".

      June 30, 2011 at 4:48 pm | Reply
    • Paul Johnston, PhD Economics

      Why in the world would the IMF & EU give more money to Greece's corrupt Politicians who keep stealing all the money given them when they will simply steal it ALL over again leaving nothing for citizens???

      July 1, 2011 at 2:00 am | Reply
    • joe

      It's really all greek to us. But we should pay heed to the valued advice of the PIMCO boss . he knows a lot of things that we may not be aware of. As for the billions that the PIMCO boss controls- i sometimes wonder if the USA has played its cards right. Instead of throwing away a good 4 trillion dollars on the futile wars in iraq, afghan, pak- had the USA invested this in a sovereign wealth fund , and smartly invested in global securities like chinese yuan bonds, and in chinese companies, and in a smart MSCI linked world-wide portfolio- you all Americans would be the happiest folks on earth, and be really well-off. there would be no depressing talk of a debt-ceiling and other such talk. Think again- America , you have wizards like warren buffett, bill gates, soros, roger etc, - you could have led the entire world on a growth trajectory. now we feel unhappy to see Americans complaining about their economic distress. You still are a great nation. Rise up and confront the crises boldly. You should thank CNN and fareed for this interesting sounding off platform. And Fareed, please keep moderators to approve all the posts. Sometimes i see your indian-pakistani boarders writing filthy language. This should be screened by editors.

      July 1, 2011 at 7:38 pm | Reply
      • j. von hettlingen

        @Joe I agree with you, that some postings are absolutely appalling. But we have to respect the provisons of the First Amendment – Freedom of speech. We should let the posters feel the shame themselves, if they write something stupid.

        July 4, 2011 at 5:41 am |
  2. gnp in d island

    There are a lot of smart people, but this guy can, and is willing, to communicate. Do you think anyone is listening?

    June 29, 2011 at 7:49 pm | Reply
  3. GreekRiots

    When the Greeks riot, why don't they riot in the rich neighborhoods and start burning down the rich people's houses? That would make more interesting news. Pick a bunch of different neighborhoods and start burning. The police can't be everywhere. Get the "Real Class Warfare" under way already.

    June 29, 2011 at 10:13 pm | Reply
    • Willie 12345

      A nice socialist idea.

      June 30, 2011 at 10:01 am | Reply
      • GreekRiots

        Don't worry. You"re not rich!

        June 30, 2011 at 12:29 pm |
    • eddy Kau

      Greece should be OUT of Euro. Euro makes PIGS countries so expensive to visit and thus tourists diverted to Asia where your money goes further and hotels a re one third of Europe. Euro is killing these countries plus Eastern Europe. Its more of Germany:s baby than France which has less money.

      June 30, 2011 at 1:52 pm | Reply
  4. Willie 12345

    We need to send President Obama to Greece to save them from ruin. It would also help us in this country if he was gone.

    June 30, 2011 at 10:00 am | Reply
    • VoipOfReason

      Your ignorance can be cured via watching something other than Fox news.

      June 30, 2011 at 12:21 pm | Reply
      • Pliny

        Sadly, there's no cure for his ignorance.

        All we can hope for is surgical sterilization, so he won't pass along his defective genes to another generatioin of ingorant, conservative hillbillies.

        June 30, 2011 at 12:37 pm |
      • thomas

        yea you Liberals are all SO smart and intelligent, your policies CAUSED the problems in Greece. The US is well on it's way with 47% of the population dependent or working for the government. Greece is at 60% and look at what's happening.

        July 1, 2011 at 2:29 pm |
  5. alex

    [youtube=http://www.youtube.com/watch?v=soLI0j00eUc&w=640&h=390]

    June 30, 2011 at 10:07 am | Reply
  6. alex

    [youtube=http://www.youtube.com/watch?v=OgcLpt6MtCE&w=640&h=390]

    June 30, 2011 at 10:14 am | Reply
  7. Charles

    Fareed, please read and edit your transcripts before you post them. This post is full of poor grammar and silly mistakes. It's kind of insulting.

    June 30, 2011 at 12:33 pm | Reply
  8. Willa

    A house of cards can only withstand a finite number of cards being piled on top of it before it inevitably topples. I'm not an economist but even I can tell that something is really off with the global economy and whatever it is, it's going to give sooner or later. It's not a matter of 'if' but 'when'. I've also been wondering since when is it a good policy for banks to be handing out orders to governments and their 'leaders'? Shouldn't it be the other way around?

    June 30, 2011 at 1:11 pm | Reply
    • JACK HALL

      you say that you're an economist? then you should know that the central banks own the governments. the banks are the NWO idiot.

      June 30, 2011 at 5:53 pm | Reply
      • Jdg

        Um, you might want to re-read the post you replied to. That person said that they are NOT an economist...

        July 1, 2011 at 5:58 am |
  9. MCR

    One thing he didn't talk about is that there are a lot of tax dodgers in Greece who own luxurious homes paid for with money they didn't pay their taxes with. Here's a thought: Give them 30 days' amnesty to pay their back taxes without penalty. After that if they still haven't paid their taxes, freeze their bank accounts and seize their assets and cancel their passports so they can't leave the country. If they still don't pay up within the next 30 days, throw 'em in jail and deduct all money owed, with interest, and expenses from government efforts to get them to pay, from their bank accounts and sale of assets.

    June 30, 2011 at 1:12 pm | Reply
    • JLS639

      Well, for one, prosecuting people and jailing them costs money. It makes more economic sense to just collect the money. For two, these are the most influential people in Greece. The guys cheating the system have the most influence over the rules.

      July 1, 2011 at 12:20 am | Reply
  10. JasonK

    Stop F-in in the front hole, in 20 years a lot of our problems will be solved. If you want to go green, you gotta go brown. S0d0my is the answer people! Reduce your carbon foot print AND the economic global woes at the SAME TIME!!!

    June 30, 2011 at 1:58 pm | Reply
  11. Brian T.

    @JasonK – Your comment is so maniacal! I don't know if I find it offensive because it's irrelevant to the article or if I find it funny because it's outrageous.

    June 30, 2011 at 2:24 pm | Reply
  12. Brian T.

    If the Greek government cannot fix things soon enough, the only action would be military occupation by a EU/NATO force and a replacement of government administration by the occupying powers.

    June 30, 2011 at 2:26 pm | Reply
  13. Chris

    Coming soon to a nation (very) near you.

    June 30, 2011 at 2:56 pm | Reply
  14. Borysd

    I can`t figure out if he answered the question "will Greece default?"

    June 30, 2011 at 5:45 pm | Reply
  15. JACK HALL

    the greeks should just default and stick it into the butts of the corrupt central banks that got the government into trouble in the first place. but noooooooooo, you can't default on a central bank, they want your money and everything you have. even your children's future.

    June 30, 2011 at 5:46 pm | Reply
  16. Byrd

    The economy of entire civilized world is going to collapse if we don't end this crooked Monopoly Game and redistribute the wealth that has been stolen by the concerted efforts of banks, corporations and our representatives in Congress. The game has been completely rigged and the dealers are all cheats.

    June 30, 2011 at 5:52 pm | Reply
  17. gok

    bloody muslim svages

    June 30, 2011 at 6:46 pm | Reply
  18. rrock

    Greece lied to the EU about their finances so they could borrow huge amounts of money from European banks. This is called bank fraud. Those who perpetrated this fraud should be prosecuted otherwise they will likely do it again.

    June 30, 2011 at 6:49 pm | Reply
  19. cjygudwin

    Socialism, not Capitalism has failed Greece. Ordinary Greeks caused this, not some hidden conspiracy of international banks.
    If you have lived in Greece, you know the lovely attitude about hard work and government entitlements.
    You could confiscate every penny from the rich in Greece and it wouldn't even begin to pay for this awful mess.

    There is no economy there. Nothing. Everyone "works" for some un-needed goverment agency in a do-nothing job. That is, if they work at all. They had tourism, but prices got so high that people go elsewhere now. Yes, they will default. Perhaps they will call it something else, but the bond markets will treat the "event" as a default.
    The result will be an inability to pay retirement and disability pensions to those people already retired.
    Honestly, the current structure is so unworkable that a total economic colapse in Greece might be the only thing that convinces the population that a new "I am to blame, I must build a solution" attitude is needed.
    Then again, finger-pointing and complaining are national pastimes. Accountability is not.

    June 30, 2011 at 7:31 pm | Reply
  20. Harvey Wallbanger

    Hey ... Greece. How do you like you socialism now? As Margret Thatcher put it, "Sooner or later you run out of someone elses' money".

    United States ... take note, you are next. It is going to be a lot harder on you. You do not have a consortium of countries to bail you out. Unless you change your ways, China will own you and all your children.

    June 30, 2011 at 9:47 pm | Reply
  21. juan

    the economie is in the loose cord this is has to happen because the third war is coming and iluminate is behind in the scripture is written the conomie collapse is close no body can do anything the politician are protecting with the new world order, making more law to opress the people because they know something big is coming. they make cities under ground they steal the money from people but noyhing will sve this tyrants. my faith is in my lord and i will wait for what is coming.

    July 1, 2011 at 12:58 am | Reply
  22. cpc65

    I heard they started renting out the Parthenon and Colosseum for children's birthday parties to raise some extra cash.

    July 1, 2011 at 1:16 am | Reply
  23. Paul Johnston, PhD Economics

    NO ONE IS ADDRESSING THE REAL PROBLEM IN GREECE & THAT IS HER CORRUPT POLITICIANS WHO HAVE STOLEN ALL THE MONEY & WILL CONTINUE TO DO SO WITH THE NEW IMF & EU FUNDS. WHO IN THE EURO ZONE THIS BEHIND THIS OBVIOUS FRAUD & EU FINANCIAL FARCE???

    July 1, 2011 at 1:44 am | Reply
  24. Paul Johnston, PhD Economics

    Why in the world would the IMF & EU give more money to Greece's corrupt Politicians who keep stealing all the money given them when they will simply steal it ALL again???

    July 1, 2011 at 1:56 am | Reply
  25. Mike

    1) The Greek labor unions control Greece.
    2) The Greek labor unions are all proudly Marxist.

    Somehow, I don't think this is going to work out.

    July 1, 2011 at 4:47 am | Reply
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    February 5, 2012 at 8:59 pm | Reply
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