Pimco, the world's largest bond fund, has called on Greece, Ireland and Portugal to step outside the eurozone temporarily and restructure their debts unless the currency bloc agrees to a radical change of course.
Andrew Bosomworth, head of Pimco's portfolio management in Europe, said current policies are untenable in the absence of fiscal union and will lead to a break-up of the euro."Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments," he told German newspaper Die Welt.He said these countries could rejoin EMU "after an appropriate debt restructuring", adding that devaluation would let them export their way back to health.Mr Bosomworth said EU leaders were too quick to congratulate themselves on saving the euro last week with a deal for a permanent bail-out fund from 2013.
"The euro crisis is not over by a long shot. Market tensions will continue into 2011. The mechanism comes far too late," he said.A few weeks ago Simon Johnson wrote at Baseline Scenario:
The bond fund argues that the EU strategy of forcing heavily indebted countries to undergo draconian fiscal austerity without offsetting stimulus is unworkable.
The austerity policies are stifling the growth needed to stabilise debt levels.
"Can countries inside a fixed exchange-rate system like the euro grow and tighten budget policy at the same time? I don't think so. It didn't work in Argentina," Mr Bosomworth said.
Pimco also gave warning that the bond vigilantes have lost faith in the policy and are trying to liquidate their holdings of peripheral EMU faster than the European Central Bank (ECB) can buy the debt, causing a relentless rise in yields, and a vicious circle....MORE
The Eurozone Endgame: Four Scenarios
In the aftermath of the Irish bailout, the German proposal for a future sovereign and/or senior bank debt restructuring mechanism within the eurozone makes complete political sense to the electorate in stronger European countries. They do not want to write “blank checks” to weaker countries and to out-of-control financial institutions going forward; creditors to countries that run into trouble will face likely losses.
While the details of this “burden sharing” approach remain to be hammered out (after Sunday’s announcements), there is no way for German or other politicians to backtrack on the broad strategic principles. But once this arrangement is in place, say in 2013 or thereabouts, all eurozone countries will (a) be able to sustain less debt than has recently been regarded as the norm, and (b) become vulnerable to the kinds of speculative attacks in debt markets that we have seen in recent weeks – to reduce funding rollover dangers, they will all need to lengthen the maturity of their outstanding debt.
The end point is clear. Last week the markets began to work backwards to today’s debt profiles; major disruptions still lie ahead.
Ultimately, there will be a eurozone will greater shared fiscal authority, a common cross-border resolution authority for failed banks, and likely greater economic integration. But there are four scenarios regarding who ends up in that eurozone – and how we get there.
First, as officials hope, the IMF bailouts for Greece and Ireland may work – by stopping the panic and reassuring the investors that there will be enough growth to make even those debt burdens sustainable. This seems most unlikely, particularly given what we have seen of the IMF package for Ireland so far.
In this scenario, everyone can continue to stay inside the eurozone. The debt profiles of Greece and Ireland would remain vulnerable, as would slow growth in Portugal and whatever Spanish banks are hiding in their so-called “stress tests.” Germany agrees to foot an open ended bill because its leadership becomes scared of the consequences. The ECB buys a lot of bonds, one way or another.
Second, there is the current market consensus that a package of IMF-European Union support for Portugal and perhaps Spain would truly stabilize the situation. This consensus is fragile – and perhaps more wishful thinking than anything else – but likely to motivate official efforts in the week ahead. But this is what we call the Maginot Line Illusion, i.e., an idea that ignores the potential for trouble to jump to other potentially weaker eurozone countries, such as Italy, France or Belgium.
In this scenario, Greece probably leaves the eurozone and restructures its debt. The Germans say “Greece should never have been admitted; this was the original and only mistake.” Ireland stays in the eurozone but many of its citizens emigrate. There could be significant grants from Germany and even from outside the eurozone, depending on how much fear spreads around the globe....MORE
