The CEO and Co-CIO of PIMCO is basically opining about the trader/investor psychology.
Monday’s disappointing market reception to the bailout package for Spanish banks is a reminder to European policymakers of something that is more than familiar to veteran sovereign crisis managers in emerging countries: The greater the erosion of policymaking credibility, the harder it is to get the private sector to buy into your plans.
As a result, rather than crowd in private capital, seemingly bold policy measures end up facilitating its exit. The answer is not to do less but, rather, to be more comprehensive and coherent in what you do.
This is a different sort of ‘confidence fairy’, one with a greater and real impact. For too long the austerity proponent have been saying that cutting spending will inspire market confidence, which will result in economic improvement. Many EU nations have been forced to cut public sector spending but the market confidence has not increased prompting some to declare death of a fairy tale.
El-Erian notes that market wants more from policy makers. Apparently, it does not care much about spending cuts in the absence of consistent policy responses to various problems.
These are all legitimate but they do not explain the extent of the sell-off in key financial assets. Indeed, the price action suggests that markets overall are losing confidence in the policy response function, and doing so in an accelerated fashion.
As such, rather than encourage the private sector to co-invest along the public sector, the provision of official financing is seen as facilitating its disengagement. In turn, this serves to aggravate the economic implosion and mounting joblessness; it also makes bank bailouts even harder to defend, politically and otherwise.
Seems like El-Erian is saying that the key to the solution is addressing unemployment problems. Without that even euro 100 billion can not calm the markets.