El-Erian: What's Weighing Heavily on the Markets
There seems to be no limit to policy uncertainties, ranging from Europe’s stuttering response to its debt crisis, to questions about the end of QE2 in the US, the debt ceiling debate, and that still-elusive balance between medium-term fiscal reform and immediate stimulus to counter a weakening economy.
When these issues are discussed, reference is often made to policymakers’ tendency of “kicking the can down the road.” Indeed, this phrase has been used so often that it prompted CNBC’s Joe Kernen and Becky Quick to solicit alternatives from the viewers of Squawk.
It appears that viewers are jumping on the invitation.
Some opted for “postponing the day of reckoning;” others preferred “delaying the inevitable;” and Michelle Caruso-Cabrera, who is reporting from Athens this week, proposed “extending and pretending.”
These are all great. My favorite, however, is a phrase suggested to me by a viewer of CNBC after I appeared on Squawk yesterday: “pushing a snowball down the hill.”
I like the phrase because it captures more than just the notion of delay. It also indicates that the size of the underlying problem gets bigger in the interim; and the phenomenon itself accelerates.
This is most visible in Greece where the situation has become critical.
European policymakers and the IMF have spent the last year treating the country’ predicament as a liquidity problem as opposed to what it is: a solvency and growth crisis. Unsurprisingly, and despite a massive bailout package and large sacrifices on the part of the Greek population, every single economic and financial indicator has markedly deteriorated. Indeed, the deterioration has gone well beyond the policymakers own expectations.
The Greek problem has morphed in other another troubling way. By ignoring the basic issue of solvency, some previously-pristine balance sheets are now contaminated.
This is most visible in the case of Europe’s central bank, the ECB, which has acquired billions of Euros of Greek securities (through direct purchases and repo operations with commercial banks).
In the process, it has evolved from being an important component of the potential solution to Greece, to now being a challenging part of the problem.
The IMF risks a similar outcome as it is pushed hard to lend further into a solvency sinkhole. And taxpayers throughout Europe are also being impacted, with more Greek liabilities being shifted every day to European-wide balance sheets.
Europe may be the most extreme and immediate illustration of the snowball phenomenon, but it is not the only one.
Here in the US, political dithering (and bickering) is complicating the country’s ability to deal effectively with structural impediments that slow economic growth, limit the reduction in unemployment, and undermine the country’s position at the core of the global system. And this applies to all four of the major areas of structural impediments: housing, bank credit, public finances, and the functioning of the labor market.
In the days ahead, I suspect that Squawk will get many more suggestions for alternatives to “kicking the can down the road.” Perhaps CNBC could aggregate them into a clear message to policymakers around the world: Balance sheets and other structural problems will repeatedly impact headlines (and weigh on markets) unless policymakers alter their course.
Mohamed A. El-Erian is CEO and co-CIO of PIMCO.