Greece is Going to Be Really Hard to Solve – El-Erian

Allianz Chief Economic Advisor Mohamed El-Erian spoke with FOX Business Network’s (FBN) Maria Bartiromo about the global economy. Regarding the Eurozone, El-Erian said, “the mood as a whole is better. People believe that the Eurozone is benefitting from the weaker exchange rate” and that “people realize that Greece is going to be really hard to solve.” When asked whether it would be a big deal if Greece left the Eurozone, El-Erian said, “in the short term it would be a great deal” and that “it’s not as if someone’s going to announce that Greece is leaving because no one wants to go down in the history books of having taken that decision.”

On the Eurozone

“So the mood as a whole is better. People believe that the Eurozone is benefitting from the weaker exchange rate, from QE and from the oil prices. However, there’s now much more realism towards Greece. People realize that Greece is going to be really hard to solve and that we are looking at a potential accident, but they’re not as worried — and rightly so because Europe has taken major steps to protect itself from Greek contagion.”

On whether it would be a big deal if Greece left the Eurozone

“So in the short term it would be a great deal. And it’s not as if someone’s going to announce that Greece is leaving because no one wants to go down in the history books of having taken that decision. If Greece leaves it’s because of a massive accident. The positive outflows, capital controls, an alternative IOU currency, that’s what it’s going to look like, a little bit like Argentina in December 2001. Those are the circumstances under which Greece leaves. Messy in the short term, but containable over the medium and long term.”

On the UK election

“I think whoever comes to power, is not going to have enough to be able to force through big changes. We would have to muddle through parliament, muddle through economic policies.”

On UK Labour Party

“So let me tell you, the conventional wisdom is if Labour wins, you’re going to see a big difference in economic management and you’re not going to see an E.U. referendum. And therefore it’s negative and positive for the market net-net, zero. I don’t think — I think if Labour wins, you’re going to see a major change towards the attitude towards the financial sector. Labour is going to go much further in regulating the financial sector. It’s going to be less resistant to change from Brussels. And as a result, liquidity is going to be reduced even more. That’s what happens if Labour wins.”

On his thoughts on what Federal Reserve Chairman Janet Yellen said earlier today

“So it goes back to what we were talking about a few minutes ago. There’s a limit to which you can decouple prices from fundamentals. So central banks can do a lot to raise asset prices, but unless the fundamentals improve, they start getting worried. I think the second issue, which is the biggest underappreciated risk right now is what I call the illusion of liquidity. Investors truly believe they can reposition themselves at low cost should the paradigm change, and the evidence is that’s not the case. There’s been a structural change in the markets’ provision of liquidity and the regulators are getting really concerned about this.”

On investing in the United States

“The simple fact is that regulation plus markets have shrunk the risk-taking capacity of broker-dealers. Meanwhile, the end users have gotten bigger and bigger. So imagine that the intermediaries are getting smaller and smaller; the end users are getting bigger and bigger and if the end users change their mind, suddenly there isn’t enough liquidity to reposition themselves. We’ve had a warning, that’s what the taper tantrum was really about.”

On where the growth is in the economy

“It’s quite broad-based and I’m really excited as what I’m seeing in terms of innovations that are enabling individuals to do things that they could never do before. The empowerment of the individual today through technology, through social media, through the Internet is huge. And that is creating all sorts — look at Airbnb. Look at Uber, these are businesses that overnight created the same supply as the traditional businesses created in 5-10 years.”

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