Investors are justified for viewing the Greek debt deal with skepticism and should reduce their risk allocation accordingly, Pimco's Mohamed El-Erian said.
Problems in Greece are just the highest-profile set of geopolitical risks with which the market must deal - the others being Iran and Syria - which could cause disruptions sharply and quickly, said the co-CEO of the world's largest bond fund manager.
"The market is being very rational in saying it's a step but it's not a big enough step yet," El-Erian said of the Greek debt deal announced earlier in the week. "Fundamentally, Greece is going to have to find a way to restore growth and restore competitiveness. If it doesn't do that, private capital isn't going to come in and if private capital doesn't come in you don't get the oxygen that an economy needs."
In addition, the deal, which likely will see bondholders lose more than 70 percent of the principal plus reductions in coupon payments for the Greek notes, faces "implementation risk." The deal still must be approved by constituents of the Troika - the European Central Bank, the International Monetary Fund and the European Commission - that negotiated the pact. They include the Greek public as well as private and official creditors.
Greece faces debt in excess of 120 percent compared to gross domestic product and has been forced to adopt stern austerity measures as conditions of getting tranches, or installments, of international aid.
In doing so, though, the country risks hampering the growth necessary so it can pay its obligations in the future. Many economists believe Greece ultimately will leave the European Union so it is not bound by the euro currency restrictions.
"These are major decisions and only Greek society can make (them)," El-Erian said. "So far it's been let's kick the can down the road because nobody wants to make a major decision."
On a global level, El-Erian said the contagion risks from Greek as well as the disruptions to energy supplies from Iran and Syria pose even more economic risk.
Should any of those situations escalate, central bank policy makers will be limited in their ability to respond after the massive balance sheet expansion and zero-interest-rate policies adopted in the wake of the 2008 financial crisis.
Though healing, the U.S. economy, in particular, is in some ways more exposed to an event like the credit collapse that happened after Lehman Brothers fell in September 2008 because the economy is weaker now than it was then, El-Erian said.
"We have less economic and policy flexibility - that's the bad news," he said. "The good news is the central banks are doing all they can to limit the damages to the payments and settlements system."
With stocks rallying this year, El-Erian said investors should take some money off the table, halve exposure to gold and oil, and concentrate bond exposure to the middle part of the yield curve - the five- to seven-year range.
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