Greece's sovereign debt restructuring is inevitable, PIMCO co-chief investment officer Mohamed El-Erian said on Sunday, warning the nation's problems could contaminate Europe.
It is inevitable that Greece will have to restructure its debt. Europe has been kicking the can down the road, treating Greece's problem not as a solvency issue, but as a liquidity problem, he said on CNN's Fareed Zakaria GPS program.
Greece is teetering on the brink of defaulting on its huge public debt. The government is seeking parliamentary approval for an unpopular set of austerity measures demanded by the European Union and International Monetary Fund to release a much-needed 12 billion euro ($17.2 billion) loan tranche.
The Greek parliament is due to vote Wednesday and Thursday on measures that include 6.5 billion euros worth of additional austerity steps for this year and savings of 22 billion euros for 2012-2015 to cut deficits and keep qualifying for EU-IMF aid.
It also speeds up the sale of state assets under a 50 billion euro privatization program.
Greece has too much debt and cannot grow until these problems are solved. More and more of Europe is going to be contaminated, said El-Erian, who helps to oversee $1.1 trillion in assets at PIMCO, the world's largest bond fund manager.
While the United States' public finances were a bit shaky, El-Erian said the country was fundamentally different from Greece, adding it had much more time to deal with its fiscal policy issues.
It supplies the dollar as a reserve currency, it supplies the deepest financial markets, which mean that other countries were willing to outsource their savings, he said.
Still, PIMCO remains bearish on U.S. government debt. El-Erian said PIMCO found better value in government bonds outside the United States.
It's an issue of valuation. U.S. bonds have benefited enormously from the Federal Reserve buying then under the QE2 (quantitative easing) program which ends at the end of June, he said.
So when we look at Treasuries, we see the big buyer stepping away from the market, and we ask who else is going to be buying at these levels, and we can't identify another buyer of the size of the Fed.
El-Erian said the market has underestimated the impact of the end of the Fed's $600 billion government bond-buying program, which was intended to stimulate the economy by driving down interest rates.
(Reporting by Lucia Mutikani; editing by Jeffrey Benkoe)