'Nothing But Bad Choices' Ahead for Greece: El-Erian

Bond holders of Greek debt at some point are going to have to accept restructuring if the crisis is ever going to get resolved, Pimco's Mohamed El-Erian told CNBC Monday.

Photo: Norbert Schiller for WEF

Delaying a solution to the debt problem in Greece has only made matters worse and has caused the contagion to spread throughout the euro zone, according to El-Erian, whose firm oversees more than $1.2 trillion in assets and runs the largest bond fund in the world.

"We have, unfortunately, nothing but bad choices," he said. "What we're looking at is better burden-sharing. Right now more of the burden-sharing is being taken by the Greek people."

Problems with debt in Greece and other peripheral countries in the euro zone intensified last year but have yet to be resolveddespite the implementation of a 750 billion euro bailout package from the International Monetary Fund.

Greece has been rife with street protestsfrom people accustomed to government spending who are opposed to the various austerity measures to get the nation's finances back in order.

El-Erian said public sentiment is ruling the day so far, making a solution more difficult. While he did not specify what type of restructuring would need to take place, the likelihood of a bondholder "haircut," or principal reduction, for bond holders likely would be a central consideration.

"The driving seat right now is occupied by the Greek people. Forget about the Greek Parliament, the EU, the ECB," he said. "The initiative right now is in the streets of Greece and that's not where you want it, because it's very difficult to collectively organize a solution there."

Political pressure has made a solution elusive.

Other more fiscally stable members of the European Union, such as France and Germany, have been facing resistance from their citizens in how widespread a Greek bailout should be.

El-Erian said spreading the burden through the EUis vital toward addressing the issues before they spread even further.

"The Germans have it right in the sense of saying we cannot continue this process whereby the burden is carried by fewer and fewer people," he said. "But the French and now the ECB, which holds a lot of this debt, say no. That's what happened with a year of inaction."

He compared the Greek crisis to the default in Argentina in 2001, which did not trigger lasting damage because investors understood it was more "technical contagion," which presented a buying opportunity, rather than "fundamental contagion," which would have had more devastating consequences.

Further delay on the Greek situation, El-Erian warned, would have severe consequences.

"The issue is nothing so far has been done to solve the two problems Greece has: One, excessive debt and second, an inability to grow," he said. "This problem is not going to go away. It's going to weigh on markets here and we're going to see the same set of headlines over and over again. We simply cannot continue to kick the can down the road, because we're coming to the end of the road in Greece."