May 21 (Bloomberg) -- Greece may have to exit the 17-nation euro and the monetary union should plan for it to ensure stability, according to Pacific Investment Management Co.’s Mohamed El-Erian.
“A Greek exit will be expensive and messy, but it’s probably inevitable and therefore we should plan for it,” El- Erian, the chief executive officer of the world’s largest manager of bond funds, said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
Group of Eight leaders on May 19 urged Greece to stay within the euro area as polls in the country showed a close race between parties supporting and opposing the European Union’s bailout deal. The country is preparing for June 17 elections, following an inconclusive May 6 ballot.
The economies of the union are being gripped by political confusion as policy makers fail to develop solutions to address Greece’s worsening financial crisis, El-Erian said. Investors pricing in both a “policy risk premium” and a “complexity risk premium” is adding to volatility in markets.
The euro has lost 3.7 percent against the U.S. dollar this month and almost $4 trillion has been wiped from equity markets amid concern the turmoil in Greece may weigh on other members of the economic union.
Germany, France, Italy and Spain, the union’s four biggest economies, need to take the lead in solving the crisis by creating a smaller currency union that is “less imperfect,” said El-Erian, a former deputy director of International Monetary Fund.
“For Greece there is no first best,” El-Erian said. “They’re looking at a series of fifth and sixth bests. They have to focus on which step allows them medium-term viability.”
The euro area’s populations, private creditors, European partners and the IMF need to work together rather than separately, which they are doing now, he said.
Yields on U.S. 10-year bonds may drop another 10 basis points, or 0.10 percentage point, or rise another 30 basis points, El-Erian said. The benchmark security’s yield rose 1 basis point to 1.73 percent at 9:53 a.m. in New York.
The likelihood of further easing from the Federal Reserve, continued sluggish growth in the U.S. and continued turmoil in Europe will impact the bond yield, said El-Erian, who is based in Newport Beach, California.
Pimco is a unit of the Munich-based insurer Allianz SE and managed $1.77 trillion as of March 31, including the $258.7 billion Total Return Fund, according to the company’s website.
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