El-Erian PIMCO - 8Dec2011 pt1

8 Dec 2011 Bloomberg

(Presenter)
You were saying the ECB is waiting for the IMF and other leaders to do something on the fiscal side before it takes more action. Is that the right move by Draghi?

(Mohamed El-Erian)
You know it's hard to tell [!] It's the right move in terms of maintaining the institutional integrity of the ECB. It's not the right move if you believe that this crisis is getting worse and worse and you need to have the Colin Powell doctrine of over-whelming force. The stakes have been raised hugely. And the approach has changed. The original approach was let's stabilize the periphery. Now there's a recognition that you have to stabilize the core of the Eurozone [oh my god]. That's why you hear Sarkozy saying we need another foundation for the euro. So this is big, we will look back on this as a big moment in history.

(Presenter)
For tomorrow, what would need to happen that might change the game?

(Mohamed El-Erian)
You need to come up with some important and credible decisions. The first decision is a vision of what the Eurozone is going to look like in 3 years' time. Is it going to be the same size or is it going to be smaller and less imperfect [Wow]. The second is a clear signal as to who is going to provide the bridge as the European governments implement all this, i.e. a signal that the ECB would be willing to go all in. And third, you need a mix of not just deft and deficit containment but also growth.

We need to see these things come out tomorrow otherwise markets will remain very nervous.


(Presenter)
If we fall short of those three things what will happen to the markets and to the global economy?

(Mohamed El-Erian)
If we fall short, the downside risk to the global economy will increase even more. If we fall short the fragility of the banking sector in Europe will increase and the debt cost of the periphery will increase.

(Presenter)
Some have talked about the European national banks resurrecting their old currencies again. What is your response?

(Mohamed El-Erian)
If there is a total fragmentation of the Eurozone....that discussion is something everybody should be having.

It's not about kicking the can down the road. Europe has been rolling a snowball down the hill [!]

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