Greece’s leftist government has been locked in negotiations with bailout creditors over economic reforms in exchange for a rescue loan, which the government says it needs to make a debt payment to the International Monetary Fund on June 5.

“I don’t think we can muddle through forever on Greece,” El-Erian said on CNBC’s “Squawk Box.” 

“Deposit outflows continue,” he warned.

Greek Finance Minister Yanis Varoufakis said he’s thinking about imposing a charge on cash withdrawals from bank ATMs and on over-the-counter transactions to encourage electronic banking and to fight widespread tax evasion.

“The economy in Greece is back in recession,” El-Erian said. “Capital controls are likely. The government is likely to issue an IOU in order to meet its payments.”

El-Erian compared the situation in Greece to the 2001 financial crisis in Argentina. “It’s very difficult to control things on the ground. I wouldn’t underestimate the probability of a ‘Graccident.'”

But on the positive side, the impact of a Greek accident would not sink the euro zone, El-Erian said. “This is not 2010. This is not 2012. The euro zone has done a lot to contain the risk of contagion. It doesn’t mean you won’t get some.”

He said the immediate impact would be felt in European stocks and a further weakening of the euro currency. “There will be some spillover to the U.S., but the main impact will be in Europe.”

If Greece does go under, El-Erian said he would expect a strong response from the European Central Bank “to loosen even more monetary policy and to try to protect the peripheral economies.”