Buyers of European sovereign debt are going to have to accept some losses if the problems there are ever going to be rectified, Pimco's Mohamed El-Erian told CNBC.
Nevertheless, "it's a very exciting time to be an investor" as turmoil in the debt markets presents a variety of opportunities, according to the co-CEO of the world's largest bond fund.
"The main issue right now is the integrity of the euro zone is getting weaker and weaker as we delay the problem. They are simply kicking the can down the road," El-Erian said. "Ultimately there will be a haircut to bonds issued by certain governments in the euro zone, and the longer we delay that recognition the bigger the problem and the more disorderly the process will be."
But El-Erian said a "multi-speed market" is creating a variety of opportunities for investors who keep their eyes out for well-placed offerings in the debt market, particularly in US municipals.
Pimco has made headlines lately since El-Erian's counterpart, Bill Gross, disagreed with noted banking analyst Meredith Whitney's call that there will be widespread defaults on local government bond issues.
"We are in the midst of a massive adjustment in the state and local level that we're going to have to undertake," El-Erian said. "The key issue when you invest in municipals is two things: It's not just in the rate risk, it's interest rate and credit risk, and therefore be highly differentiated. You want to be very high up in the credit curve."
Municipals have been the center of a larger debate on the precarious state of local government financing, particularly in light of huge deficit overhangs and crippling unemployment that has stymied growth.
In prior remarks, El-Erian has pointed out the importance of government officials focusing on unemployment, not just as a cyclical trend but rather as a structural problem within the US economy. He said the Federal Reserve has addressed the cyclical aspect with the liquidity and rate-adjustment tools it has, but has not been backed by structural reforms at the congressional level.
In his Friday interview, he praised Fed officials for addressing recently the importance of unemployment as a block to productivity. Since the financial crisis began in 2008, companies have focused on improving profits by cutting costs. But some economists think that trend has reached its limit and companies will need to start hiring again to achieve additional productivity gains.
"The Fed is the only agency right now doing anything about unemployment, and it doesn't have the right instruments for that," El-Erian said. "The unemployment issue is not just a big social problem, it will also have a big impact on markets."