Oct 26, 2010
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.”