Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., talks about Ireland's financial system.
El-Erian, speaking with Tom Keene on Bloomberg Television's Surveillance Midday also discusses prospects for Japan's recovery from the March 11 earthquake and tsunami, and the outlook for the Brazilian economy.
El-Erian on the Ireland bank crisis:
"It is a debacle. Another number I like to use which puts it in the Irish context is initially it costs them 35% of GDP. It could cost them more than 50% of GDP. That is an enormous number that is having to be plugged into a banking system."
On if the commercial banks in Europe are taking an appropriate haircut:
"The only people doing their fair share right now--in fact I would say they're doing more than their fair share--are the taxpayers of Ireland who are having to go through a tremendous austerity, and the IMF and the EU that are putting in money. Most of the creditors so far have not gone through any burden sharing. It is remarkable. It is inadvisable. It is a political decision that has been taken. It surprises me. I do not think you can sustain that political decision."
On what the elites of Europe are hoping for:
"What they are hoping for that by maintaining the creditors intact, that the creditors are going to rush back in with new money. What they have not read is the history of debt crises. The history of debt crises is very simple. Whenever you have a debt overhang, this big cloud of debt, no new creditor will come in in a big way."
On what he saw in Tokyo that we're not hearing from the media:
"Two things surprised me. One is the extent of uncertainty that remains. The extent that this invisible threat of radiation is causing a tremendous amount of uncertainty. On the other side I was so impressed by the courage and steadfastness of all the Japanese I met. They are so focused on let's go through the rescue operations, reconstruction, and let's help those in Japan that have been less lucky than we have been."
On if he would invest in Japan right now:
"We will be part of the reconstruction process. I think that we will see many private-public partnerships. Pimco will be there in terms of looking at suitable opportunities. I think more generally there will be tremendous opportunities. This is a country that will spend anything between 2% to 4% of GDP in its reconstruction phase so there will be lots of opportunities as we go forward."
On Pimco's investments in Brazil:
"In July 2002 when bonds were trading at 45 cents on the dollar, we saw opportunity. We have been going to Brazil every quarter. We truly believe if you get a few things right, this is an economy that is capable of what we call a breakout phase. What you see in this chart, what you see in many other charts is that this is an economy that is truly going through this historic phase. It used to be said Brazil is the economy of tomorrow--always has been, always will be--well today and tomorrow is happening now. It is in the development breakout phase. It has isolated elements of overheating, that is why the central bank is raising interest rates. That is why the fiscal agency is looking to adjust, but they are truly finding their rhythm, and they are promoting growth at levels that was unthinkable before."
On what he thinks we will see this year and next year:
"I'm going to divide that between what should happen and what is likely to happen. What should happen is after the sequential contamination of the balance sheet, that the public balance sheet is not going to be able to hand off to a healthy private sector. To some extent we see this in the United States. We see multinationals have gotten their act together. They are now able to go forward. In Europe, you do not. The Ireland news today is--not only can we not hand off to the private sector, but the private sector has more debt that they want to hand off to the public sector. It is circuitous. What we would like to see is an orderly handoff from an over indebted public sector that has had to step in, not out of choice but out of necessity to avoid a depression, to a healthy private sector. What we're likely to see is the multi speed world in which some countries are able to do it, but unfortunately too many countries are not able to."
On how to draw the "have nots" into the debate as we come out of crisis:
"Bill [Gross] and I--we do not consider ourselves elite. In fact, we'd like to be taxed more. I said this even before the Middle East started: It is not in the interest of any society for income inequality to keep on going up. It is in everybody's interest to avoid the extremes."
El-Erian on the idea of society's elite pulling up those that are struggling:
"That is the American dream. To enable other people to back fill and come up and replace. That is how a society goes from strength to strength. The worst thing that can happen, and this is why we have had revolutions in Egypt and elsewhere, is for the elite to believe itself to be so special that it isolates itself from the rest of society. Society does not accept that."