ECB playing a 'game of chicken', says PIMCO

The reluctance of the European Central Bank (ECB) to fill the role of 'lender of last resort' for struggling sovereigns makes the likelihood of a 'Minsky Moment' in Europe "uncomfortably high", according to PIMCO.

Austerity measures and deleveraging in Europe are contributing to a debt/deflationary feedback loop, which will see the eurozone economy shrink by between 1 and 1.5 per cent in 2012, said PIMCO managing director and portfolio manager Saumil H Parikh.

However, Europe's problems could become much worse if the ECB continues to refuse to engage in quantitative easing programs (at the moment, the ECB only has a clear mandate to maintain price stability).

The region faces the prospect of credit drying up and the system's deleveraging turning into a Minsky Moment, according to Parikh (ie, the inflection point when investors must sell assets to pay off debts, pushing down asset prices across the board).

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"The eurozone economy cannot bear a concomitant deleveraging in sovereign and banking system balance sheets, given an already weak growth outlook," said Parikh.

The ECB is "playing a game of chicken with eurozone fiscal agents", and as things currently stand it is likely that the ECB will come to the rescue only when it is too late, said Parikh.

PIMCO chief executive Mohamed El-Erian recently told a Greek newspaper that a haircut of over 50 per cent may be necessary for Greece to restore its debt sustainability and set it on a path to growth in the medium term.