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Stand by Ireland to Stop Contagion: El-Erian

CNBC.com
Wednesday, 24 Nov 2010 | 9:59 AM ET

Ireland faces an uphill struggle to survive the turmoil currently plaguing it, and the rest of Europe will need to stand by the country if it wants to avoid the debt crisis spreading further across the region, Mohamed El-Erian, CEO and co-CIO of Pimco wrote in a commentary piece for the Financial Times on Wednesday.

EU building flags brussels
EyesWideOpen | Getty Images
EU building flags brussels

“In Ireland difficult policy decisions and trade-offs must be made, executed and sustained by a government with a paper-thin parliamentary majority and low popularity ratings among its citizens,” El-Erian said.

“Ireland’s problems are Europe’s problems,” El Erian wrote, adding it is crucial that other euro zone member states resist arguing over who bears the brunt of bailout costs for countries in need of financial life support.

It is “unusual to see creditors signal so loudly their willingness to provide additional funding, before the borrower is ready to detail what it intends to do to restore its solvency,” El-Erian said.

The willingness of the European Central Bank and the International Monetary Fund to provide funds to support Ireland therefore underlines Europe’s concerns about Ireland and its fears the crisis might spread to Portugal or Spain next, he said.

Europe now needs to take meaningful action, but this is not an easy endeavour, according to El-Erian.

Irish and European agencies will need to work together effectively to undertake “a tremendous amount of technical work,” he said.

Solvency and liquidity challenges must be addressed and Europe’s yet-to-be used financing facility must be made operational quickly, with little room for slippage, El-Erian said.

In addition, “the IMF must also demonstrate agility in its support.”

But even if Ireland’s creditors succeed in addressing those challenges, the country may not yet be out of the woods.

“The rescue financing available will be of little use if it ends up simply funding the large-scale exodus of existing depositors and creditors,” El-Erian said.

The events in Ireland could just be “preambles for the many further chapters yet to be fully devised, let alone written”, El-Erian said.

Portugal and Spain may be next in line if Europe wants to avert crisis, he warned.