Tags: Pimco | European | Central | Bank | Europe

Pimco’s Kashkari: Only European Central Bank Can Save Europe

Tuesday, 13 Dec 2011 06:45 AM

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European governments can make all the promises they want to unite under one fiscal roof, but at this point, only the European Central Bank can save the continent from imploding by stepping in as a lender of last resort, says Neel Kashkari, head of equities at Pimco, the world's largest bond fund.

Calls for the European Central Bank (ECB) to buy more debt held by troubled European nations have been growing, although politicians in wealthier countries like Germany say their counterparts in Greece, Italy, Spain and elsewhere need to push through painful austerity measures to heal their economies, even if those measures are unpopular.

That argument, Kashkari tells CNBC, may be too late.

"If it's not the ECB, who's it going to be?" Kashkari says.
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The Central Bank is "losing sight of the fact that they’re causing real damage to the European economy and to the global economy, and the longer they wait, the more damage is done, the more expensive this crisis becomes."

The ECB is mandated to control inflation, which may complicate calls for the institution to bail out debt-ridden countries via purchasing their debt, which could pump up inflation rates.

Still, purchasing debt in such a way, known as quantitative easing, may be necessary, Kashkari adds.

"Until we see the ECB go all in and say they’re effectively going to call a massive quantitative easing, funding the governments to bring down the borrowing cost of Spain and Italy to create that firewall, I don’t think we’ll see a resolution in this crisis."

European leaders recently agreed to better coordinate fiscal policies, although market support for the pact was short-lived.

"The pact that was agreed upon by European officials still has a long way to go in order to come to fruition, and that leaves the market open to riot," says Mark Luschini, chief investment strategist at Janney Montgomery Scott, according to Reuters.

"We're seeing that sentiment surface in Italian bond yields, and that suggests the market is still highly skeptical of any solution to the risk of significant default that could be brought forward in the coming days."

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