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Pimco's El-Erian tells Spain to seek bailout

The chief executive of the world’s biggest bond fund manager has warned Spain must apply for a bailout now to prevent further deterioration in the country’s already perilous financial position.

Mohamed El-Erian, CEO and co-chief investment officer of Pacific Investment Management Company (Pimco) said Spain risks a similar fate to Greece if the country does not apply for a full-bailout under the European Stability Mechanism, Europe's permanent rescue fund, in an interview on BBC's Newsnight on Wednesday.

The application is a condition of the European Central Bank intervening and buying Spain's bonds, which will help lower the country's rising borrowing costs. Spain's prime minister Mariano Rajoy has said he was ready to seek a rescue package for the country but only if borrowing costs remain too high for too long. “He [Rajoy] should go to the ESM... for the simple reason that interest rates are already too high,” El-Erian said during an interview on the BBC’s Newsnight. “And it’s not just the interest rate on government debt, it is the fact that capital continues to leave Spain, the private economy continues to explode, and oxygen [is being] sucked out of all the job creating machines. So he should apply, he should get support, and hopefully he can crowd back in private capital”

Pimco's Mohamed El-Erian

Without applying for a bailout, El-Erian argued that Spain’s borrowing costs will rise once again to an unsustainable 7%. “The ECB will not disperse [funds] without an application from Spain and a ‘light’ set of policy conditionality,” he said. In addition, El-Erian said there was a high probability that the single currency will exist in 12 months, but that it is less clear whether the eurozone will remain a 17-member bloc of countries, and that Greece’s future as a member looks especially bleak.  

“In Greece the rejection is complete... it’s economic, it’s financial, it’s social, and it’s political,” said El-Erian. “So I do not see if you extend a year’s time how Greece remains in the eurozone... and I’m not sure that the population there will tolerate just more of the same because it hasn’t gotten them anything nor does promise them a light at the end of the tunnel.”

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