Two nations in two different kinds of trouble require two different kinds of assistance, says Mohamed A. El-Erian, chief executive and co-chief investment officer of PIMCO. In a pair of written opinion pieces published on Wednesday and Thursday, El-Erian discusses Japan and Portugal and the broader European debt crisis and what he considers the inadequate response of European leaders. In both cases, he called for more cohesive action on the part of government leaders.
In the case of Japan, with its triple catastrophe of earthquake, tsunami and nuclear power plant troubles, El-Erian (left) warns against a rush to judgment on how quickly Japan can get back on its feet. While the world looks at the Kobe earthquake in 1995 as an example of how quickly Japan can recover from a terrible calamity, he warns that far more factors are at work that could slow the recovery and rebuilding that he is nonetheless sure will take place.
El-Erian points out that at the time of the Kobe temblor, the world was in a better place: thriving economies globally and a lower debt load nationally positioned Japan to rebuild relatively quickly, despite the loss of life and need to restore infrastructures. Now, however, Japan staggers under a debt load that has already reduced its sovereign rating and must also deal with the ongoing nuclear crisis. Tokyo itself was affected this time, if not directly, and both food and manufacturing pose ongoing problems as radiation contamination threatens the one and lack of power and capacity slows the other.
The lack of a strong global economy will also slow the process of rebuilding, and the global rise
of food prices will take a toll as well. The need for cohesive action by the Japanese government, something that has not been much in evidence, is also necessary not just for reconstruction but for regrowth.
Portugal’s, and Europe’s, Troubles
As European leaders held two days of meetings in Brussels on Thursday and Friday to discuss the continent’s response to its debt crisis, El-Erian turned to the Europe in a separate essay.
Portugal faces trouble of a different kind, El-Erian wrote in his regular blog for Reuters. Its difficulties can spread to the world stage as well, since its debt problems look likely to push it into bailout status in the wake of Greece and Ireland. But the lack of cohesive action on the part of eur zone ministers who must find a way to construct a unified strategy to deal with Portugal’s need for access to markets threatens not just Portugal, Ireland and Greece, but the broader group of nations.
El-Erian points out a litany of failures in the current European policy more than a year into the crisis. Despite the collective European response which he admits has “managed to limit disorderly debt contagion” Europe has failed to solve the “problems of the highly indebted peripheral economies.”
“The challenges of the most indebted have become more acute, not less,” he argues, and “excessive debt stocks have risen rather than fallen. Borrowing costs remain at prohibitive levels. Market-discounted private sector claims are being paid in full, transferring the burden from creditors to stretched taxpayers and public services. Unemployment, already at alarming levels, continues to rise. And the countries are no closer to regaining a path of economic growth and prosperity.”
While El-Erian says it is unlikely that Portugal will default, even in the absence of euro zone progress, he points out that the stopgap measures cobbled together by the group’s leaders can only go so far and cannot restore nations to financial health. A troubled world economy is, he says, “an irritation but not an excuse.” Something bolder and more drastic is called for, he says, similar to the “orderly and voluntary restructuring . . . implemented earlier in Uruguay and elsewhere.”
Rather than wait for the implementation of the new and permanent rescue mechanism set to replace the European Financial Stability Facility (EFSF) in 2013, says El-Erian, it is time for European leaders to take action now.