Mohammed El-Erian has been around, first at the IMF, then to PIMCO, then to the Harvard Endowment, then back to PIMCO, where he’s CEO and co-chief investment officer. In a Q&A with Barron’s last week, his thoughts on the Greek tragedy wandered onto some other themes.
On the Greeks, he notes: “This past week the market came under pressure from late sellers, people who recognized that Greece isn’t interest-rate risk but a volatile credit risk and thus needed to trim positions. It blew out spreads significantly and made the market highly illiquid.”
So far, so bad. But it gets worse, he says. “For too long, markets have priced in what we called at PIMCO an immaculate recovery for Greece — this notion that the private sector would continue to buy into artificial growth and long-promised fiscal adjustment on the part of Greece and would provide so much financing that it would lower Greece’s borrowing costs to such low levels that you could get both fiscal adjustment and growth.”
So much for those Goldman Sachs swaps designed to help Greece paint a rosier picture of its public finances. But that gets us to the El-Erian’s main point: does creative accounting promote growth – or merely hide a lack of liquidity?
“Today, 40% of global GDP resides in countries running deficits of 10% or more, and it’s dominated by industrial countries. You have much more robust earnings dynamics from emerging economies, Australia, Canada, than countries that relied on structured finance as the engine for growth, like the US and UK.”
Always good to know that Canada stands in the ranks of upstanding economies – though this time, they’re not necessarily from the OECD.