Greece’s debt problems are about to spread to other countries and could infect the United States unless this country starts solving its own mounting debt problems, warns Mohamed El-Erian, co-CEO of Pacific Investment Management Company (Pimco), which runs the world’s largest bond fund.
"We've seen a crisis start in a country — Greece — become regional, impact the whole of the euro zone and is on the verge of truly going global," El-Erian says, so “we should take this very seriously."
The system is slowly starting to have cascading failures, El-Erian notes.
“It's like a pipe that you need to be free-flowing and it starts to clog,” he told CNBC. "This is a shock to the system and it's going to have an impact on valuation."
El-Erian acknowledges that the U.S. differs from Greece in that we have more time.
“But what the Greek crisis tells you is debt and deficits matter,” he points out. “The structure of your deficits matter and the U.S. doesn't have much flexibility."
El-Erian also strongly cautioned against underestimating how quickly debt contagion could spread from Greece to the U.S.
"There are structural headwinds out there and we better get our act together before those structural headwinds become overwhelming," he says.
Greece’s GDP will decline 4 percent this year and 2.6 percent next year, according to the Finance Ministry, Bloomberg reports.
European Union Economic and Monetary Affairs Commissioner Olli Rehn says that the austerity measures Greece agreed to for its May 2 bailout package will deepen the contraction by 1 percentage point this year and by 2 percentage points next year.
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