Greece Likely to Default Within Three Years, El-Erian Says

By Susanne Walker
Oct. 25 (Bloomberg) -- Greece is likely to default within three years because budget-cutting measures won’t be enough to reduce the nation’s sovereign debt burden, Pacific Investment Management Co. Chief Executive Officer Mohamed A. El-Erian said.
A default is likely “as long as you can contain the contagion to other countries and it is done through orderly restructuring and repricing to retain competitiveness,” El- Erian said at a conference sponsored by the Economist magazine in New York today. “The alternative doesn’t promise growth and employment generation.”
Europe’s sovereign debt crisis erupted at the end of 2009 after Greece’s newly elected socialist government said the budget deficit was twice as big as the previous administration had disclosed. The European Union and International Monetary Fund approved the aid package on May 2 in exchange for the Greek government agreeing to cut public-sector wages and pensions and raise taxes on fuel, alcohol and cigarettes.
“I have never seen 11 percent of GDP being delivered”
under the current program assumptions, El Erian said. The debt burden at the end of the process is likely to be higher than it was at the beginning, he said.
“The most likely outcome is at some point when the rest of system will be reinforced, they will have to address the debt overhang and its competitive position,” he said.

Greek Debt

Credit-default swaps protecting Greek government bonds for a year cost 568 basis points, 66 basis points less than 10-year protection, according to CMA in London. Before the nation was rescued with the 110 billion-euro ($153 billion) international loan package in May, investors concerned Greece would renege on its debt commitments were willing to pay 665 basis points more for one-year swaps than for 10-year insurance.
The shift may suggests that Prime Minister George Papandreou’s spending cuts and austerity measures are buying the country time to reduce a budget deficit that’s more than four times the European Union’s limit.
Greek bonds fell, with the 10-year bond yield increasing one basis point to 9.42 percent today, leaving the gap with similar German notes at 6.88 percentage points.