El-Erian sounds alarm over crisis in Greece

Published: June 11, 2015 11:26 a.m. ET

Market Watch

By SARA SJOLIN MARKETS REPORTER

“…unemployment rate in the Hellenic Republic rose to 26.6% in the first quarter of the year, up from 26.1% in October-December…”

Greece’s worrisome high unemployment rate is a stark reminder of the “alarming situation” in the country, with the crisis increasingly threatening to hit the European Central Bank’s reputation, Mohamed A. El-Erian, chief economic adviser at Allianz, said on Thursday.

Read: This amy be Greece’s biggest brain drain since the death of Socrates

His comment comes after a duo of downbeat news for Greece confirmed that the continuing negotiations debacle between Athens and its international lenders are hitting the debt-laden country’s economic and labor market.

On Thursday, The Wall Street Journal reported that bailout talks between Greece and its international creditors stopped without a firm agreement, throwing some doubt into the ability of the groups to strike a deal.

Late Wednesday, Standard & Poor’s Ratings Services downgraded Greece further into junk territory, prompting a tweet from the former Pimco chief executive about financial and reputational risks for ECB and ELA.

n an interview with Bloomberg TV Thursday morning, El-Erian further elaborated on the risks involved for the ECB in continuing to support Greece.

”Don’t forget that not only does the ECB have a huge payment coming from Greece in July, but the ECB has just increased the amount of lending to Greece on its emergency lending assistance (ELA),” he said.

“That is not an instrument you’re supposed to use for propping up solvency, it’s supposed to be used for liquidity and the deeper Greece goes into junk territory, the more it highlights the reputational and financial risks the ECB is taking,” El-Erian.

Athens has been scrambling to reach a bailout deal with international lenders since the Syriza-led antiausterity government was elected in January. The uncertainty about Greece’s finances have slammed Europe’s financial markets, but also hurt the country’s economy and sent it back into recession.

If reports of talks stopping without progress weren’t bad enough Thursday, Greece had already been stewing over negative news from its statistics office, showing that the unemployment rate in the Hellenic Republic rose to 26.6% in the first quarter of the year, up from 26.1% in October-December and worse than the 25.4% forecast by economists polled by Bloomberg.

Before news of stalling talks surfaced, the markets had been riding higher on signs of progress in getting Greece and its lenders to reach a deal. Germany had been reportedly ready to offer the country a staggered aid deal in return for one immediately implemented reform, which was greeted with cheer by the European investment community Wednesday.

The Stoxx Europe 600 index SXXP, -0.25%  had been trading as high as 395.55 before the news of the stalled talks before retreating, though still in the green, to close 0.6% higher at 393. The benchmark had jumped 1.8% on the news Wednesday that a Greek deal may be near.

In the Bloomberg interview, El-Erian warned that the negotiations are “very complicated,” with many parties that need to be satisfied.

“Policy makers are losing control of the situation on the ground and there’s still not a common view on what has happened and let alone what needs to happen. So even if you come up with yet another Band-Aid, this is not a problem that’s going to be solved anytime soon,” he said.