Dubai Fallout Is a Correction, Not Another Crisis: El-Erian

by Guest Sun 29 Nov 2009, 11:58

Dubai's debt woes may serve as a catalyst for a correction in stock markets but it does not signal a new crisis, investment manager Mohammed El-Erian told CNBC Friday.

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CNBC.com

Investors dumped stocks Thursday and Friday and took refuge in the dollar after Dubai announced it had asked for a 6-month standstill on debt of around $59 billion. Some analysts said the fears will be short-lived and the situation creates buying opportunities.

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"There will be opportunities created… but this is a catalyst call. Let's see to what extent markets reprice," El-Erian, who is Pimco's co-CEO and co-chief investment officer, said in an interview.

"This is a lag financial effect," he said, adding that the crisis shows financial markets are not yet calm after last year's collapse.

"Now I think investors are going to look much closer to fundamentals," he added.

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Authorities around the world reacted to the financial crisis which started two years ago with a "tremendous" liquidity injection, but because the economic system was "clogged", this could not reach small and medium size companies which are the backbone of the real economy and instead pushed up financial companies' stock prices, according to El-Erian.

"I think whenever you have a liquidity-induced reaction in market, it's dangerous," he said.

"The big bet that the government has on right now …is that higher valuations can lead to higher production, higher spending, etc," and the danger is that stock markets correct before the effect of higher asset prices can be felt on the high street, El-Erian added.~