) -- Mohamed El-Erian is CEO and co-CIO of Pimco, one of the world's largest bond managers with $1.34 trillion in assets under management.
caught up with El-Erian at the annual Bretton Woods conference on Friday in Washington D.C. to get his take on the global financial crisis. This interview has been edited for clarity.
Pimco CEO Mohamed El-Erian
: What are your thoughts on the crisis? How serious is this situation?
: This is a serious situation because the crisis in Europe is spreading. It's still spreading today. So, not only have the Europeans not been able to contain it to Greece, they haven't even been able to contain it to the periphery.
The good news is that Europe has the capability to solve this if there's political will. The second good news is that they are getting a massive wake-up call as delegations from over 180 countries tell them how bad the situation is and how other countries are starting to feel the consequences of Europe's polity bickering and bickering.
: Is it all up to Germany?
:Germany has to make a very important political decision. Germany is the banker to the Eurozone so the banker has to have a vision of what they want the zone to look like, and until that happens, the engineering of the solution is going to be much harder.
: What's the soonest you could imagine a solution?
: I suspect that they're going to go back and think about it carefully and they're going to have to strike that balance between political leadership, where the leaders get ahead of their people and not doing anything and I suspect that now that we've seen German credit default swaps at 100 basis points (which is where they were this--Friday--morning) and now that there's a question mark about the French banking system, the sense of urgency for Europe to fix this is going to increase significantly.
: You used to manage Pimco's emerging markets bond fund. What does this crisis mean for the emerging markets countries?
:The emerging markets are on the receiving end of a technical contagion. I tell people no matter how good a house you are, if your neighborhood is in turmoil the valuation of your house is impacted and we've seen in the past few days the emerging market--bonds, equities, even currencies sell off. That is a pure technical contagion.
The second thing that's important is the emerging markets have tremendous reserves. They're going to have to have to decide how and whether they want to use these buffers, so unlike previous crises, they are sitting on massive reserves you heard the Governor
of Brazil's central bank, at the conference talk about $300 billion of reserves they have there and many of them are now net creditors and so they have to decide.
I suspect that the heart of most emerging economies is telling them 'you know what, let's try to insulate our people from crisis in the west. Let's pursue expansionary fiscal and monetary policy.'
But the head is saying 'what are you talking about? If both Europe and the U.S. are facing headwinds, this is the time to be cautious.' So I suspect that what you will see is some monetary policy loosening, some currency intervention but unlike 2008 I don't think that the emerging economies will embark on a major fiscal stimulus.
: What is your view of
:I think operation twist is exactly like QE2, which is the Fed can deliver a market outcome: Low interest rates. When you have the balance sheet that the Fed has and you have the printing press you can deliver outcomes on the Treasury curve.
So you can deliver market outcomes as we saw with QE2 but you cannot deliver economic outcomes.
I expect the Fed to be able to maintain most of the yield curve at very low rates, but unfortunately that's not going to be sufficient to stimulate this economy, because it's not a question of the price of credit, it's the availability of credit and there's a big, big difference. So, when judged by economic outcomes, this will be disappointing, but when judged by is it able to maintain low yields throughout the Treasury curve, yes it will be able to do that.
Written by Dan Freed in New York
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