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European bailout is not working, says Pimco

The assistance being given to the peripheral, debt-laden countries of Europe is not working, according to Pimco.

In a post for the Financial Times, Pimco chief executive Mohamed El-Erian warned that the European Central Bank/International Monetary Fund aid handed to Greece, Portugal, Spain and Ireland have not aided their economies, rather just aided those looking to take their money out of them.

He says: “The public sector bailout is not working. Rather than provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries.”

El-Erian says the market risk for the sovereign debt of the so-called PIGS is still “at or near danger levels” and something must be done soon to avoid sovereign defaults.

He says: “This situation cannot be sustained forever. It undermines any chance that the most vulnerable countries have of limiting the collapse in their GDP and maintaining social cohesion; it contaminates the balance sheet of the ECB; it exposes the revolving nature of IMF resources to considerable risk; and it raises the risk of renewed contagion.

“If [policymakers] continue to stumble and hesitate, what has been simmering may well come to a full boil in the next few months.”

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