Posted By thestatedtruth.com on March 10, 2010

March 11 (Bloomberg) — Mohamed A. El-Erian, whose company runs the world’s biggest mutual fund, said deteriorating public finances around the world may affect the global economy more than is currently realized.

“The importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood,” El-Erian, co-chief investment officer at Pacific Investment Management Co., wrote in an article on the Financial Times Web site. The potential damage from increased government borrowings is “at present being viewed primarily — and excessively — through the narrow prism of Greece,” he wrote.

Governments may have to raise taxes and slash spending to cope with swelling deficits after nations including the U.S. borrowed unprecedented amounts to stave off the global financial crisis, said El-Erian, 51, who shares his job title with Bill Gross. A failure to carry out fiscal measures in time would raise the possibility of governments seeking to eliminate excessive debt through inflation or default, he said.

Pimco has said debt strains in Greece, Portugal and Spain underscore its view that 2010 will be a year of slower-than- average growth, and predicts there will be a shrinking global role for the U.S. economy.

Greece, which had the European Union’s widest budget deficit at 12.7 percent of output last year, has struggled to convince investors it can bring the shortfall within the bloc’s limit of 3 percent. The government last week announced spending cuts and tax increases totaling 4.8 billion euros ($6.55 billion), the third round of austerity measures this year.

The worst of Greece’s financial crisis is over and other European nations won’t follow in its path, former European Commission President Romano Prodi said.

“For Greece, the problem is completely over,” said Prodi, who was also Italian prime minister, in an interview in Shanghai yesterday. “I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.”

The euro has weakened 4.8 percent against the dollar this year as Greece’s struggle to rein in its budget deficit eroded confidence in the European currency.

French President Nicolas Sarkozy said March 7 the 16-nation euro region must support Greece, which has more than 20 billion euros of debt maturing in April and May, or risk destroying the currency. German Chancellor Angela Merkel has so far refused to give the green light to any aid package.

Gross advised investors in a commentary published in January to seek investments in “less levered” countries such as China, India and Brazil whose economies are not as prone to “bubbling.” He called the U.K. “a must to avoid,” while recommending Germany and Canada.

The increasing debt burdens of countries including the U.S. mean many nations classified as advanced economies now may have weaker prospects than emerging economies, El-Erian wrote in Financial Times’ article.

“U.S. sovereign indebtedness has surged by a previously unthinkable 20 percentage points of gross domestic product in less than two years,” El-Erian said. “Countries will thus be forced to make difficult decisions relating to higher taxation and lower spending. If these do not materialize on a timely basis, the universe of likely outcomes will expand to include inflating out of excessive debt and, in the extreme, default and confiscation.”

Japan’s Finance Minister Naoto Kan last month said the government will start debate on overhauling the sales tax in March to help repair the country’s finances.

President Barack Obama on Feb. 12 signed a bill into law that raised the federal debt limit by $1.9 trillion to $14.3 trillion and placed new curbs on spending in an attempt to prevent this year’s record deficit from becoming worse.

Last Updated: March 10, 2010 21:01 EST

Read the entire article at http://www.bloomberg.com/apps/news?pid=20601087&sid=aYI_3n1Zc13s&pos=3#

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