Master of the Universe: Mohamed El-Erian
He has questioned the whole thrust of our fiscal policy and the viability of our future in the eurozone and must be listened to
Published 11/12/2010 | 05:00
HE is the man widely-tipped to be next boss of the IMF and believes that Ireland will have to leave the euro. As one of the most successful bond investors of his generation, it would be a brave or foolish investor who bet against Mohamed El-Erian.
As Ireland's financial crisis intensified throughout the summer and autumn of 2010, Mohamed El-Erian has gradually become a familiar figure in this country. As the chief executive of PIMCO, the world's largest bond investor with over $1 trillion (€0.75 trillion) under management, El-Erian has not been slow to voice his opinions about this country's prospects.
In an interview with business news TV channel CNBC in the aftermath of the EU/IMF bailout of Ireland, El-Erian voiced the opinion that the eurozone would be much smaller in five years time than it is now.
He predicted that it would shrink to a core of "homogenous" countries such as Germany, France, the Netherlands and Austria. Pointedly absent from his list of likely eurozone members five years hence was Ireland.
Clearly, this would be no bad thing so far as El-Erian is concerned. In the CNBC interview he repeatedly spoke of the "bad", ie the peripheral eurozone countries such as Ireland, contaminating the "good", ie the core eurozone countries such as Germany and France.
In a week when yields on 10-year German government bonds climbed above 3pc for the first in over two years on fears of the impact of possible eurozone bailouts on the public finances of the single currency's largest economy, it is hard to argue that El-Erian doesn't have a valid point.
The CNBC interview, which won him few friends on Merrion Street, wasn't the first time El-Erian has forcefully voiced his opinions on this country's predicament.
Writing on November 20, more than a week before the Irish bailout he warned that Ireland was facing a deposit outflow which, if left unattended, "could turn into a full bank run that would devastate Irish jobs, growth potential and long-term prosperity".
While El-Erian's warning about the stability of our banking system came as no surprise to Irish bank watchers, official Ireland, its nerves already fraying at the prospect of a full-scale "run" on the domestic banks, was not amused.
However, while the bailout laid any fears about the solvency of the Irish banks to rest, El-Erian's views on the structure of any bailout are still very relevant.
"Ireland and its official partners must convert a short-term liquidity approach into a more sustainable long-term solution that addresses solvency, growth and economic restructuring," he wrote.
Not alone did El-Erian call for a "decisive" restructuring of the Irish banks, warning; "measures that merely kick the can down the road will not reassure nervous and flighty depositors", he also reminded the Irish government that "you cannot fix a solvency problem by putting new debt on top of old debt".
He added: "The Irish Government must move more forcefully to overcome a debt overhang that discourages new investments and erodes the future productivity of the economy. In the process, it can, and should, strike a better balance in sharing the burden among taxpayers and creditors, in a pre-emptive and orderly fashion".
Unfortunately, the €85bn bailout deal negotiated a week later between the Irish Government and the EU and the IMF did not make any provision for such "burden-sharing", ie a write-down of Irish sovereign and bank debt. Instead, Irish taxpayers were left to shoulder the burden of Irish bank losses alone.
However, El-Erian went even further than implicitly calling for either an Irish debt default and/or restructuring. He also questioned the viability of our continued membership of the eurozone.
"There should be an open debate as to whether countries such as Ireland and Greece can regain international competitiveness through years of socially-painful income, salary and wage compression".
In other words, is the game (euro membership) worth the candle for Ireland? When the world's largest bond investor makes it quite clear that he thinks not, then it's time for Irish economic policymakers to sit up and start taking notice.
El-Erian's record means that, when he questions the entire thrust of Irish economic and monetary policy, he must be listened to. After all, unlike most Irish ministers or civil servants, he has been in similar situations before.
In 1991 Argentina pegged its currency to the US dollar. For almost a decade the policy appeared to work as the hyperinflation which had dogged the country for most of the 20th century was replaced by unprecedented stability. Unfortunately this stability came at a price. By the late 1990s economic growth had stalled, the current account deficit ballooned and Argentinian goods became uncompetitive in international markets.
In December 2001 the Argentinian currency peg snapped with the new peso losing almost three-quarters of its value against the US dollar over the following six months and the country was forced to default on its debts. The Argentinian economic meltdown meant that most bond traders lost their shirts in 2001.
Not El-Erian. Cannily anticipating what was likely to happen, he had steered clear of Argentinian bonds throughout 2000 and 2001. As a result the PIMCO emerging market bond fund, which he managed, delivered total returns of 27pc in 2001.
The son of an Egyptian diplomat and a French mother, El-Erian was born in New York in 1958. Despite his American birth he was largely educated in England. He attended St John's Leatherhead, a public (ie private school) and then went on to Cambridge from which he graduated with bachelor and masters degrees in economics.
After Cambridge he studied for a second masters degree (also in economics) and a PhD at Oxford.
The young El-Erian had originally intended to become an academic economist but the death of his father when El-Erian was aged just 23 forced a change of plan. He joined the IMF in 1983 and spent 15 years with the Washington-based organisation.
After leaving the IMF he spent a year with Salomon Smith Barney, now part of Citigroup, before joining PIMCO for the first time in 1999. After making his reputation at PIMCO by calling the Argentinian debt crisis correctly, he rose steadily through the ranks at the bond investment powerhouse.
Then in 2005 he took virtually the entire investment community by surprise when he left PIMCO to head up Harvard's $26bn (€19.6bn) in-house investment fund.
At least part of the attraction of the switch seems to have been that, as well managing Harvard's endowment, he was also appointed as a part-time member of the business school faculty.
It's not difficult to detect the frustrated academic lurking in El-Erian. In 2008 he published the critically-acclaimed book 'When markets collide' and has written a seemingly endless stream of newspaper and magazine articles in recent years. He is also a regular interviewee on business news channels CNBC and Bloomberg TV.
El-Erian's spell in academia was short-lived. In late 2007 he was headhunted by PIMCO as its new chief executive. He was also named as its co-chief investment officer at the same time.
Now El-Erian is in demand once again. With Dominique Strauss-Kahn widely expected to step down as IMF managing director in order to run for the French presidency in 2012, a vacancy could soon be opening up at the top of El-Erian's alma mater.
El-Erian is the short-odds favourite for the job if he wants it.