Greek Drama: Waiting Will Make it Worse?

Mon 20 Jun 11 | 08:08 AM ET

The following transcript has not been checked for accuracy.

i know michelle has been listening probably patiently. finance ministers are not ready to make a decision. if you had to be listening, i guess -- gr i'm in t you're the poster child for what we're talking about here. yep, seniors here are learning that they had 2200 euros a month and how they're getting 1700 euros and they're 80 years old. that's what happens when you kick the can to the very end. but let me give you the news first which is the rope you see the futures lower this morning is that the euro finance ministers did not come out and say, okay, we're going to give greece the 12 billion euro loan tranche that we already agreed to. they had with their verbiage last week suggested that maybe that was going to be the case, so the markets clearly disappointed that that uncertainty is not cleared up because they will delay the payment until they know the results of the referendum, the confidence vote on the prime minister. and also whether or not the parliament will actually pass the $28 billion austerity package and they won't vote on that until the 28th. so we have some time here. greece needs money because they have debt payments due in july and the country doesn't want to go bankrupt. in the meantime the greek people still extremely angry. we're at a very large protest last night, thousands of people. a lot of them were retirees, elderly, that have seen their pension cut in just the last few months. people who thought they were going to be able to retire earlier and haven't been able to and are worried. they said we're willing to work until we're 65, but can ompanie don't want to hire older people. so the turmoil here continues. the people here are very angry and they're starting to get very smart about the fact that the country's never in the end going to be able to pay back this debt. so why should they be suffering so much. i don't think they understand, joe, that they will suffer no matter what because the cuts have to happen regardless of what the out come is for the rest of europe. all right. this is our point. the whole point of this budget we put out will is let's preempt that. what happens with austerity is you cut current seniors. the people who get hurt the first and the worst are the people who need the government the most. poor and senior. we need to preempt and pre-seve that. you have to get us on a better trajectory, economic growth, job creation, reform these programs, get your spending under control. preempt a debt crisis and get this country agreeigrowing agai. we know what that road looks like. michelle is a good friend of my wife's and she's telling us what happens. this is precisely what we're trying to prevent here and unfortunately, the political paralysis is preventing us from doing that. so our hope is to get a down payment on this situation and then we have to make a decision what kind of country do we want to have. mohammed el-erian is the ceo of pimco. and he's been watching this situation. you're worried the europeans are throwing good money after bad. so what's the solution? i was in europe last week and there's nothing but bad choices. they're looking at a series of bad choices which makes it very difficult to take a decision. so as michelle said, they've decided not to decide when it comes to the creditors. meanwhile greece is seeing a tremendous amount of bickering and the issue is nothing so far has been done to solve the two problems greece has. one, compete excessive debt and inability to grow. it will weigh on our markets here and we'll see the same set of headlines over and over again and we cannot continue to keep the can down the road because we're coming to the end of the road this greece. we've all used kicked can down the road. people writing in saying please don't use that anymore but there's not a better way to describe what happens. what is the solution? how do you tackle these two massive problems? how do you a care of austerity without killing growth entirely? first you recognize it's a solvency issue, not a liquidity issue. second you recognize that waiting has contaminated it. so part of the problem now is that the ecb balance sheet has gotten contaminated. so you need to have an action plan for that. thirdly, you need to protect the economies that do not have the characteristics of greece, but could get contaminated. spain, italy. you need to move on plan b quickly, otherwise you're going to get stuck and everything's going to be more difficult. a year ago the ecb balance sheet was not contaminated so we could have solved it easier. today it is contaminated, so it gets more complicated. and six months time, gets even more complicated. so waiting around, not to kick the can down the road, but just waiting around makes the solution even more difficult. that sounds like an argument for outbreak where they come in and yacquadrant off the city an burn it. how do you take care of the burn without burning everybody there in. burning is not the right word. what we're looking at is better burden sharing. right now most of the burden sharing is being taken by the greek people. you heard michelle say they've said enough. in fact the driving seat is occupied by the greek people. forget about the parliament and eu, ecb. what has happened is the initiative now is in the street of greece. and that's not where you want it because it's very difficult to collectively organize the solution there. it sounds like your answers are mutually exclusive, though. since it's a solvency issue, you need the creditors to take haircuts, but that will no longer -- but you also say insulate spain and italy from the problems. that's the problem. if you make -- if you do give haircuts to the creditor, you finally take away some of the owe thus from the greek people and put it on the banks, then suddenly you have problems because everybody wants the same restructuring or more favorable tirms f terms for the debt. you're saying everything's hard choices. what do we need to do? i think you're back to 2001. people are saying argentina cannot depaul because it will contaminate brazil. argentina did default. contamination to brazil was technical in nature, not fundamental in nature. and brazil over came it. investors can differentiate between technical contagion which is a buying opportunity and fundamental contagion which is not a buying opportunity. that's the first issue. second, countries like brazil and italy and spain understood what they had to do. so the solution is there. it just takes political courage. so you're saying we need to not bail out the bond holders this greece. you say they could take a haircut. that's what merkel finally folded on with sarkozy. and the germans had it right in the sense of saying we cannot continue this process whereby the burden is carried by fewer people. thets let's have a broader burden sharing. there's been a year of inaction. how long will angela merkel be able to hang on? how long are the german people going to underwrite southern europeans? she's reversed her position on this. this. what do you see -- i know with the spreads on greek debt went up about 1700 basis points last week. is it diverging away from the other countries or is portugal and ireland heading the way of greece? italy and spain are are the ones that could tip this thing over. where do you see these countries going in relative i toward one another? we're seeing a lot of public bickering not only within germany, but what's most unsettling is between the german government and ecb that were once regarded to be on the same wave length. in terms of what's happening elsewhere, unfortunately, ireland and portugal have come under pressure. both of them have a growth problem. so it's understandable that they're coming under pressure. and the longer the situation fester this is greece, the more ireland and portugal will be treated the same by the markets. michelle told us earlier that the greek citizens recognize that this is not necessarily a bailout for greece, this is a bailout for the big banks. as this becomes more and more apparent, why wouldn't they force their politicians to say, okay, we'll pull out of the euro, we'll devalue it, which is how everybody else gets out of their currency issues. that's the way the situation is going about if no one gets into the driving seat and proactively decides where they want to go. everybody's stepping back now waiting for the other party to act. and that's what happened last night in europe. the creditors basically said let's wait to see what greece is going to do tomorrow. what you're seeing is very natural which is you start getting mistrust. you have what we call in economics an uncooperative cooperative game. so it needs to be cooperative. but it's becoming increasingly uncooperative. so what are the odds that they pull out of the euro eventually do you think? i think the longer the situation persists, the higher they get. i think that if all we get this time around is simply another attempt to throw money at a structural growth issue and all that happens is just throw money at it, in six months type the probability of a debt restructuring and probability of a devaluation will be much higher. okay. mohammed, thank you.