Sept. 1 (Bloomberg) -- The European Central Bank will
probably cut interest rates as the chance of a recession in the
euro zone has risen to 50 percent, Mohamed El-Erian, chief
executive officer of Pacific Investment Management Co., said in
an interview.
“I would expect the ECB to change course,” he said.
“They’re going to be pushed to do so.”
The ECB has raised its benchmark interest rate twice this
year, taking it to 1.5 percent, in an effort to keep inflation
expectations in check. ECB President Jean-Claude Trichet told
the European Parliament on Aug. 29 that the bank is reviewing
its assessment of price risks after growth in the euro area
slowed.
El-Erian, whose Newport Beach, California-based company
runs the world’s biggest bond fund, said there’s “definitely”
a risk that Europe will drag the rest of the world economy into
a recession. He put the odds of another contraction in the U.S.
at somewhere between 33 percent and 50 percent.
Growth in the 17-nation euro area slowed to 0.2 percent in
the second quarter from 0.8 percent in the first -- with the
German economy almost grinding to a halt -- as Europe’s debt
crisis roiled financial markets and weighed on confidence.
The PIMCO executive and former International Monetary Fund
official likened the financial turmoil in Europe to the subprime
crisis in the U.S. Just as what happened in America, troubles
that began in a small part of the economy with questions about
Greece’s finances in 2009 are spreading elsewhere.
“The dynamics are very similar to what we saw here,” El-
Erian said.
ECB Purchases
Spain’s five-year bonds fell for a fourth day today as
demand waned at an auction of the securities, deepening concern
that ECB purchases to stem the debt crisis won’t be enough to
support the market.
The ECB, which is barred legally from buying bonds directly
from governments, has restrained Italian and Spanish borrowing
costs for three weeks through purchases in the secondary market.
Contagion from the debt crisis sent both nations’ 10-year yields
to euro-era records almost a month ago.
The central bank “has gone from being a part of the
solution to being part of the problem because it now has a lot
of this debt on its balance sheet,” El-Erian said. If the debt
is restructured, the ECB will “take a hit and will most likely
have to raise capital,” he added.
The approach that European policy makers have taken in
response to the region’s economic emergency is akin to “rolling
a snowball down a hill,” according to El-Erian.
‘Problems Get Bigger’
“The problems get bigger and the dynamics get more
disorderly,” he explained. “That is what is going to occur if
they continue with these ad-hoc solutions.”
So far, the rescue bill in Europe includes 365 billion
euros ($518 billion) in official loans to Greece, Portugal and
Ireland, the creation of a 440 billion euro fund as well as the
bond purchases by the ECB.
The failure of those steps to bring the crisis to an end
has sapped business and household confidence. The European
Commission’s index of executive and consumer sentiment fell last
month to 98.3 from 103, its biggest drop since December 2008,
three months after the collapse of Lehman Brothers Holdings Inc.
probably cut interest rates as the chance of a recession in the
euro zone has risen to 50 percent, Mohamed El-Erian, chief
executive officer of Pacific Investment Management Co., said in
an interview.
“I would expect the ECB to change course,” he said.
“They’re going to be pushed to do so.”
The ECB has raised its benchmark interest rate twice this
year, taking it to 1.5 percent, in an effort to keep inflation
expectations in check. ECB President Jean-Claude Trichet told
the European Parliament on Aug. 29 that the bank is reviewing
its assessment of price risks after growth in the euro area
slowed.
El-Erian, whose Newport Beach, California-based company
runs the world’s biggest bond fund, said there’s “definitely”
a risk that Europe will drag the rest of the world economy into
a recession. He put the odds of another contraction in the U.S.
at somewhere between 33 percent and 50 percent.
Growth in the 17-nation euro area slowed to 0.2 percent in
the second quarter from 0.8 percent in the first -- with the
German economy almost grinding to a halt -- as Europe’s debt
crisis roiled financial markets and weighed on confidence.
The PIMCO executive and former International Monetary Fund
official likened the financial turmoil in Europe to the subprime
crisis in the U.S. Just as what happened in America, troubles
that began in a small part of the economy with questions about
Greece’s finances in 2009 are spreading elsewhere.
“The dynamics are very similar to what we saw here,” El-
Erian said.
ECB Purchases
Spain’s five-year bonds fell for a fourth day today as
demand waned at an auction of the securities, deepening concern
that ECB purchases to stem the debt crisis won’t be enough to
support the market.
The ECB, which is barred legally from buying bonds directly
from governments, has restrained Italian and Spanish borrowing
costs for three weeks through purchases in the secondary market.
Contagion from the debt crisis sent both nations’ 10-year yields
to euro-era records almost a month ago.
The central bank “has gone from being a part of the
solution to being part of the problem because it now has a lot
of this debt on its balance sheet,” El-Erian said. If the debt
is restructured, the ECB will “take a hit and will most likely
have to raise capital,” he added.
The approach that European policy makers have taken in
response to the region’s economic emergency is akin to “rolling
a snowball down a hill,” according to El-Erian.
‘Problems Get Bigger’
“The problems get bigger and the dynamics get more
disorderly,” he explained. “That is what is going to occur if
they continue with these ad-hoc solutions.”
So far, the rescue bill in Europe includes 365 billion
euros ($518 billion) in official loans to Greece, Portugal and
Ireland, the creation of a 440 billion euro fund as well as the
bond purchases by the ECB.
The failure of those steps to bring the crisis to an end
has sapped business and household confidence. The European
Commission’s index of executive and consumer sentiment fell last
month to 98.3 from 103, its biggest drop since December 2008,
three months after the collapse of Lehman Brothers Holdings Inc.
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