Monday, October 3, 2011

EL Erian

Susie Gharib

 It`s been called "le TARP"; the EFSF is Europe`s version of America`s TARP bailout fund. It functions like a bank providing loans for troubled Eurozone nations. Of the 17 countries making contributions, France, Germany and Italy have put in the most money. It works like this - - a troubled country like Greece applies for a loan. It negotiates terms with the European Commission and the International Monetary Fund. Then, the loan must be unanimously approved by the fund`s members.

The loans are not a handout; they must be paid back with interest. Right now, the rescue fund is low on cash. It started out with $340 billion a year ago, but is tapped out after making loans to Portugal and Ireland. Eurozone countries are now voting to expand the fund to nearly $600 billion. Many economists believe it needs at least $2 trillion to be effective. Our guest tonight has been calling on European policymakers to take stronger and faster action to solve the debt crisis. He`s Mohamed el- Erian, CEO of PIMCO, the world`s largest bond fund. Hi Mohamed, nice to you have back.

GHARIB: So let`s talk a little bit about this fund. Is it big enough to do its job to fix the European debt crisis?

EL-ERIAN: It`s not big enough as yet. So Europe is taking a two-step approach. Number one, get all the parliaments to approve and number two, try to lever (ph) up the fund because you need a lot of money. You need a lot of money to stabilize sovereign debt and you need a lot of money to stabilize the banking system. So today was an important step, Susie. But it`s the first step in a pretty long journey.

GHARIB: Now you have been very critical about the way the policymakers in Europe have been handling the debt crisis. What should they be doing that they`re not doing?

EL-ERIAN: Two things. One is they should move quickly to stabilize the situation. And today`s step is an important one. It`s necessary but not sufficient so they got to get money into the system. And they`ve got to move quickly. Second they`ve got to deal with Greece in a more realistic fashion. No one believes that what Greece is doing today is sustainable. So we need a new approach to Greece. And third, they need to tell us what their vision for the Eurozone is going forward. (INAUDIBLE) these three things we`re going to go from one uncertainty to another uncertainty with a bit of good news in between.

GHARIB: Now even if the Europeans come together and work through this financial crisis and they follow the suggestions that you are making, how long is it going to be before the European economy starts growing again, helping American businesses and U.S. markets?

EL-ERIAN: A long time, unfortunately. So a lot of damage has been created. We just did our assessment here at PIMCO and we think that next, for the next 12 months, Europe is going into recession. So Europe will probably contract by 1 percent, so we`re not going to get help here in the U.S. from Europe. If anything, Europe will be a headwind for us economically.

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