Allianz’s El-Erian Cites ‘Illusion of Liquidity’ as Biggest Market Risk – CNBC
“The biggest risk is this illusion of liquidity,” El-Erian told cable television network CNBC. “The major concern is that you get a change in the paradigm, and then people discover that there isn’t enough liquidity to reposition.”
El-Erian said that the lack of liquidity could result in a market selloff, although he said such a scenario was not his “baseline.”
“If people no longer believe that we are in a low-volatility, improving U.S. economy, geopolitical shocks become too big. If all that changes, then you’re looking at least a 10 percent correction, and at that point, there is going to be a question of what holds.”
Curbs on banks’ ability to take risks and an increase in technology-driven trading have resulted in dramatic upswings in volatility that have put post-crisis financial markets to the test in recent months.
A selloff in stocks and lower-rated bonds last October was worsened by a lack of banks and market-makers able to step in and buy assets that were being dumped.
El-Erian also said that, while the risks surrounding Greece’s finances and continued conflict in Ukraine were significant, a Greek exit from the euro zone would not be cataclysmic for the global economy, though it would create “short-term chaos.”
(Reporting by Sam Forgione; Editing by Alden Bentley and Nick Zieminski)