The bailout proposal to tax bank savers in Cyprus risks that country's exit from the euro zone and calls into question the "sanctity of bank deposits in Europe," Pimco Co-CIO Mohamed El-Erian told CNBC on Monday.
"Europe lit the fuse of two sticks of dynamite on Saturday. One is very clear," El-Erian said in a "Squawk Box" interview. "By including small depositors they are risking social unrest, political disorder, and an exit from the euro zone." He added that small depositors should be exempt and that's exactly what Cypriot ministers are trying to do ahead of a Tuesday parliamentary vote.
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"The other stick of dynamite that's been lit is much more complicated and more uncertain," El-Erian added. "That is a question mark about the sanctity of bank deposits in Europe. And a reminder that Europe has too many objectives and too few instruments." He said he thinks the political system there is "failing Europe."
(Read More: What You Need to Know About Cyprus: El-Erian)
The weekend announcement that Cyprus would impose a tax on bank accounts as part of a 10 billion euro ($13 billion) bailout by the European Union broke with previous practice that depositors' savings were off limits.
The government there said Cyprus has no choice but to accept the bailout with the tax on deposits, or go bankrupt.
There hasn't been a run on the banks in Cyprus or in Europe. "It's really good news that it hasn't happened," El-Erian said, "because a bank jog or a bank run is really difficult to contain because it becomes rational to join it once it starts." But he added that he thinks "it's too early to declare victory."
(Read More: What You Need to Know About Cyprus: El-Erian)
As for whether he'd take money out of European banks, he said no. He said the difference between this situation and the 2008 financial crisis in the U.S. is that the central banks are much more engaged now.
"The central banks have understood the 'Lehman Moment' if you like. And do not want it to happen again," he said.
"I think it's a different threat this time. It's less of a liquidity problem and much more that citizens in Europe are losing confidence in the established political order and the political parties."
