UPDATE 3-PIMCO's El-Erian: Further ECB action needed in Greece

Wed Jun 16, 2010 2:46am IST

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* El-Erian sees more ECB bond purchases in Greece

* "Institutional integrity" of ECB could be in question

* U.S. not in same category as Greece in debt crisis

(Repeats to additional subcribers)

By Jennifer Ablan and David Gaffen

NEW YORK, June 15 (Reuters) - Greece's deepening credit crisis could force the European Central Bank to purchase additional debt of the troubled eurozone nation, the chief of the world's largest bond fund said on Tuesday.

"I think what we are going to see over the next few months is the ECB having to buy more and more Greek bonds," Mohamed El-Erian of Pacific Investment Management Co, PIMCO, told Reuters Insider television.

The ECB had about 25 billion euros ($30.8 billion) of Greece's mountain of debt on its books at the end of May and is adding another 2 billion euros a day, on average.

Greece's troubles have continued, however.

On Monday, Moody's Investors Service downgraded Greece's credit rating four notches into "junk" bond territory. Greece's debt load is forecast to reach 149 percent of gross domestic product by 2013.

El-Erian said the ECB purchases come with a price.

"At some point, and it is very hard to predict when, there's going to be concerns about the institutional integrity of the ECB. People are going to say, 'Wait a minute, it is a monetary authority. What's it doing in the quasi-fiscal world? What's it doing acting like a fiscal agency?'"

( Reuters Insider video: link.reuters.com/fam22m )

For its part, the United States has debt problems of its own, but not of the same credit spiral as Greece, he noted.

"The U.S. has a lot more time to deal with this issue," said El-Erian, who helps oversee more than $1 trillion at PIMCO. "The U.S. has massive global advantages. It is the reserve currency, which means whenever there is a shock in the world, the U.S. becomes the flight-to-quality and the flight-to-liquidity. We are seeing that today."

That's not to say that the AAA credit rating of the United States is airtight, El-Erian said. "At some point, when you only have dirty shirts in your closet, it's about your cleanest dirty shirt. The U.S. is your cleanest dirty shirt."

To put it simply, the assets and growth prospects of the United States look best when compared to other parts of the world. "On present fiscal trajectories, within three years, you could see a lot of stress on the credit rating," he said.

Against the backdrop of numerous uncertainties, PIMCO has been a buyer of Treasuries as a "short-term trade." El-Erian also said the firm still has exposure in gold, but slashed it in half because of its run-up in prices.

"We are still 'long' gold but not as long as we were at more attractive valuations," he said.

( Reuters Insider video: link.reuters.com/pus22m )

El-Erian added that energy is a commodity worth holding because of the high consumption of it in emerging market countries. "You not only see that in how much (emerging market countries) consume, but the efforts the Chinese are making to secure future supply."

How does the BP crisis affect his call? "The BP crisis would make you, in the short term, more bullish on oil because supply is being taken off the market. Long term, it is a question mark."

(Additional reporting by Lauren Young; Editing by Dan Grebler)

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