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The giant bond fund PIMCO said Europe has not yet tamed its debt crisis and will soon face a “second Greece” in Portugal as the country’s economy spirals downwards.
Mohamed El-Erian, PIMCO’s chief executive, said Portugal will need a second rescue as the original package of €78bn (£65bn) falls short, setting off a political storm over EU rescue costs.
“Unfortunately, that is how it will be. It will make the financial markets nervous because they are worried about a participation of the private sector,” he told Der Spiegel over the weekend.
German finance minister Wolfgang Schäuble insists that Greece is a “completely unique case” and that there will be no further haircuts for banks, insurers and pension funds holding eurozone sovereign bonds.
However, the EU authorities broke their pledges so many times during the Greek saga that market faith has been shattered. Even Norway’s sovereign wealth fund has expressed disgust, signalling that it will give Club Med debt a wide birth from now on. It has already sold half its Spanish bonds.
The fund, under Norway’s finance ministry, voted against the Greek debt deal on the grounds that European institutions were exempted from losses and given “special” treatment. “It's very important to create trust in the markets. To create trust you have to stick to the rules,” said director Yngve Slyngstad.
If the Greek haircut formula is ultimately extended to Portugal, private creditors can expect to lose everything. The EU and the International Monetary Fund already own most of the debt, reducing everybody else to cannon fodder status. Mr El-Erian said EU leaders are deluding themselves if they think they have solved Greece’s problems. “The Greek package is going to fall apart quickly. Bridges built to go nowhere can collapse at any time,” he said.
The IMF said in its latest report that Greece remains “accident prone” and may need further help and more debt haircuts if the economy “fails to respond rapidly enough to reforms”.
It warned that a “disorderly euro exit would be unavoidable” if the EU cuts off support. Such an outcome would threaten the IMF itself with unprecedented losses.