LatinFinance - Special Edition - August 2013 - 77

ternalities and you lose by internalizing the
negative externalities. it is impossible not to
come up with some policy incoherence.”
But despite the challenges, the era of
emerging market crises is long past, el erian
says. “We will continue to have these bouts
of volatility. it means that there will be some
policy incoherence. it means that the full
potential of certain countries will not be
exploited. But it does not lead us to the old
crisis world.”
What’s changed, in el erian’s view, is that
emerging markets have now achieved financial self-determination, thanks to improved
governance and fundamentals. “countries
have taken control of their destiny. it
doesn’t mean that they’re not buffeted by
what’s happening outside – there are always
risks that you can’t control – but they are
in much better control of the risks you can
control.”
the result is that “it’s much harder for
technical dislocation to tip the average latin
american country into the bad old multiple
equilibria, where one bad outcome would
increase the probability of another worse
outcome,” he says. “that is a fundamental
difference.”
the new latin america “is somewhat
better at avoiding own goals, so they score
few own goals. and it has built much more
resilience to external shocks. that doesn’t
mean that it can avoid the cold; it cannot.
But it can avoid the cold from developing
into something worse.”
But nevertheless, weak points remain. el
erian says today’s global economic weakness poses the gravest risk in latin america
to argentina. “in this environment, there
are certain countries that will tip. argentina
will tip,” he says.
this is not his first bearish call on argentina. in 1999, as manager of Pimco’s emerging markets bond fund, he sold $2 billion of
argentine debt, convinced that the country’s economic dynamics looked bad – even
though the sovereign at the time represented 20% of the JP morgan benchmark index.
that call was famously vindicated two years
later when argentina defaulted on its $100
billion debt.
in contrast, in october 2002, as anxiety gripped Wall Street over the possible
election in Brazil of leftist candidate luiz
inácio lula da Silva, el erian would fly in
the face of mainstream logic and bulk up
on Brazilian dollar debt – just as lula’s poll
lead widened and the nation’s currency and
bonds slid. Pimco dug in its heels, adding to
its portfolio of roughly $1 billion in Brazilian
to read more, see www.latinfinance.com

TAILS, YOU LOSE : Western central
bank policy has put many emerging economies “in a lose-lose situation,” says Pimco CEO Mohamed
El Erian

mohamed el erian

“EvErything has
bEEn ovErvaluEd.
WE’vE had artificial
pricing EvEryWhErE,
starting from thE
us trEasury markEt
all thE Way out.
What you’vE had is
an adjustmEnt”

dollar debt.
at the time, el erian insisted that a default was not on the cards. “Brazil has the
willingness and ability to make its debt
payments,” he said then. “those who are
betting on a Brazil default are likely to lose.
We’re bullish on Brazil because it is a good
buy at these levels.” that bet not only paid
off for the firm – but cemented el erian’s

status as an investor.
today, el erian says Brazil faces the
risk of “policy incoherence” in the face of
slowing growth and a global re-pricing of
risk. “i would put Brazil nearer to mexico
than argentina, but it’s not mexico. mexico
has benefitted from the institutional anchor
that Brazil is still developing. in the absence
of institutional anchors people will go back
to old bad habits,” he says.
Not so stable
anxiety over an early end to the $85 billion
monthly bond purchases still weighs heavy
on the financial markets. But the problem,
as el erian sees it, is that the markets are
conflating a winding down of unorthodox
policies with a normalizing of the interest
rate cycle.
the latter is unlikely to happen soon,
he says, because growth in the advanced
August 2013 - 25 Years - l atinfina nce.com 77

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LatinFinance - Special Edition - August 2013

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