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Why negative interest rates are so damaging: El-Erian

The longer negative interest rates persist, the greater the damage to the world financial system, Allianz Chief Economic Adviser Mohamed El-Erian said Monday.

With "low and even" world growth, "you're going to see central banks, particularly in Japan and Europe, try to do even more to boost their economies, said El-Erian. "The system isn't build to operate with negative nominal rates."

Negative rates prevent services such as insurance companies and pensions to get the yields they need to thrive, not to mention the chilling effect negative rates have on savers, he said on CNBC's "Squawk Box."

"We're going to have an impaired financial system," he said. "It means fewer long-term financial services that are credible for society."

El-Erian also cited a high political risk to negative rates: "That's something people can identify with. It looks absurd. What do you mean, I'm going to lend to my money and I'm going to pay you interest? Give me a break."

Leaders in Japan and Europe need to get their fiscal houses in order to take pressure off central banks, he said.

"Central banks are like doctors, they never walk away from the patient," El-Erian said. "Even though they haven't got the right medicine, they will continue prescribing."

Besides the economy, another major theme at the spring meetings of the International Monetary Fund and World Bank this weekend was the concern about wildcards like the June vote in the U.K. on whether Britain should leave the European Union trading block.

El-Erian also said he was not surprised Sunday's meeting of major oil-producing countries in Doha failed to lead to an output freeze.

It was shocking that oil traders had hoped for an agreement, he said, referring to last week's nearly 8 percent rise in West Texas Intermediate crude, the American benchmark.

The lack of a deal among OPEC and non-OPEC producers was the result of distrust among the participants, El-Erian said, predicting oil prices would remain volatile and hover around current levels of about $38 per barrel.

"We are going to put this [no deal] behind us quite quickly," he said. "We are seeing supply destruction going on. We're seeing some pickup in demand. And traders are getting used to the new reality of pricing, which is a little more volatile but ... doesn't indicate long-term trends."

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