Mohamed El-Erian

By Mohamed A. El-Erian
The opinions expressed are his own.

With its high unemployment and stretched balance sheets, today’s US economy can ill-afford a negative shock from abroad. Yet, this is what it is experiencing. And it explains why markets go through bouts of nervousness about the debt crisis in Europe, and why American policymakers are worried about a foreign financial situation that is getting worse by the day.

Europe’s debt problem is indeed a headwind for what remains a disappointing US economic recovery. It dampens America’s export prospects, can raise the cost of borrowing for some American companies and diminishes an already low enthusiasm among banks to lend to households and small companies.

Having said that, it is unlikely, though not inconceivable, that Europe’s debt crisis would constitute a “Lehman Moment” — a situation that totally paralyzes American economic activity, puts the country on the verge of a depression and triggers yet another round of extreme crisis management measures.

There is now broad-based recognition of America’s persistent economic weakness. Most recently, the Federal Reserve has been forced again to revise downwards its growth projections for both 2011 and 2012. Moreover, with refreshing candor that speaks well to the uncertainties felt by the average American, Fed Chairman Ben Bernanke acknowledged in his second ever press conference on June 22 that only part of the economic weakness is due to transitory factors such as higher oil prices and supply disruptions associated with the Japanese tragedies.

As Bernanke hinted, and as PIMCO’s analyses have demonstrated for a while, the US unfortunately faces four structural headwinds that are yet to be addressed properly by policymakers.

First, and nearly three years after the global financial crisis, the US housing market is still unable to find a firm enough footing. This undermines confidence and limits labor mobility.

Second, joblessness remains worrisomely high, and to make things even worse, is increasingly structural in nature. Witness the 9% unemployment rate, declining labor participation and an alarming 24% unemployment rate among 16-19 year-olds and a 40% rate for African-Americans.

Third, credit is yet to flow properly in the economy. With bank lending still hampered, it is small companies and poorer households that suffer the most.

Fourth, there is a problem of debt and leverage. Coming off a “great age” of debt and credit-entitlement that went way too far, balance sheet rehabilitation has been uneven and generally insufficient. Yes, some sectors, led by multinational companies, have recovered strongly. But far too many in the private sector are still over-indebted. Meanwhile, public balance sheets, be they of the Federal Reserve or the fiscal agencies, are contaminated to such an extent that they now constitute a source of medium-term uncertainty.

Policy responses have been too timid in the face of the economic challenges, and for too long, lacking a central vision. Instead, they have been ad hoc, too reactive and lacking sufficient structural underpinnings.

In the absence of a credible alternative, the role of the country’s main economic spokesperson has fallen to President Obama who, understandably and correctly, is extremely busy with many other national and international priorities. Meanwhile, the other arms of government — Congress in particular — are hostage to extreme political polarization, posturing and bickering. And the recurrent drama associated with budgetary legislation discussions — including the continuing budgetary resolution of a few months ago or today’s debt ceiling debate — adds to the uncertainties facing the nation.

In sum, this is not an economy that is well positioned to deal with a shock from abroad, let alone a major one. Its ability to absorb a systemic shock has been worn down by persistent internal economic weaknesses and the agility needed to sidestep, or at least minimize the impact of the shock, has been eroded by slow economic policy responses and stretched balance sheets.

All this helps to explain America’s concern about Europe’s debt crisis, which has led to periodic selloffs in capital markets and warnings from policymakers. It also speaks to why some commentators have gone as far to suggest that the country faces another “Lehman Moment” — a devastating shock that totally paralyzes the economy, disrupts the functioning of the financial system and pushes the country to the verge of a great depression.

This situation was last faced in the fourth quarter of 2008 following the disorderly collapse of Lehman Brothers, the investment bank. As illustrated by various recounts of those nervous months, policymakers came very close to losing complete control of the situation, despite all the firepower at their disposals.

Indeed, if it weren’t for the aggressive use of what was at that time a relatively healthy public sector balance sheet (especially that of the central bank’s), the US would have been forced into temporarily shutting down its financial system (including by declaring a “bank holiday”) and experiencing an economic depression which, according to some, would have been worse than that of the 1930s.

The question of the “Lehman Moment” becomes even more important now that policymakers have less firepower at their disposal to counter a huge shock. So what should we expect in the months ahead?

To be sure, the European debt crisis is a serious political, economic and financial engineering predicament that is hard to solve. As such, it will likely get worse before it gets better. In the process, it will slow global economic growth, increase risk premiums and darken the cloud over the health of the financial sector in Europe.

None of this is welcome news to an American economy that urgently needs to create jobs. But it need not result in a repeat of the total Lehman paralysis provided three conditions are met: a banking system that remains robust, no disruptions to money market funds and limited blockage to the plumbing of the country’s payments and settlement system.

Chairman Bernanke has spoken publicly to all three. Noting the Fed’s focus on these issues, he has indicated that the US does not face a new Lehman Moment.

Published data, to the extent that they are comprehensive and accurate, support his view; as do the actions taken by certain institutions. But risks remain, particularly within a money market complex starved for yield, and where certain firms appear to have stretched far and wide for extra returns.

A small risk of a catastrophic event should never be ignored. Accordingly, there is no room here for any complacency among policymakers whose economic management to date has fallen far short of what is needed to create jobs and put the country back on the path of high and sustained economic growth. Indeed, Europe serves to amplify warning sirens that have been ringing for a while.

Let us all hope that the increasing volume of the alarm will finally push America to design and implement the type of holistic measures that are desperately needed and long overdue. In the meantime, risk-averse companies, households and investors are justified in taking some extra precautionary steps.

Note: Mohamed El-Erian will be doing a live Q&A on Reuters.com on Thursday, July 7 at 9 a.m. ET. He will be answering your questions and responding to your comments about this piece along with his other previous pieces.

On Thursday, July 7 at 9am ET, CEO of PIMCO Mohamed El-Erian will be taking your questions live and answering them here. Please join us and leave your comments and questions for him below.

El-Erian’s previous columns have talked about the European debt crisis, how to make Egypt’s revolution successful, the IMF, Dominique Strauss-Kahn and Christine Lagarde and what he learned from his recent visit to Tokyo, Japan.

You can also post your questions on the Reuters Facebook page or send them over Twitter using the hashtag #askmohamed or @kherrup.

It is a great pleasure to be with you today. I would like to express my deep appreciation to the Board of Trustees of the American University in Cairo … and extend my immense congratulations to AUC’s graduating class of 2011.

At this time, and more than ever, AUC and other centers of learning in Egypt occupy a very important position in a country that is in the midst of historic transformations. In today’s Egypt, universities are — and should be — much more than centers of learning. They are critical facilitators of beneficial change for millions of Egyptians; for current and for future generations; and for the well-being of a country, a region, and a global system.

People look to our centers of learning for education and thought leadership. They look to them for guidance in navigating complex economic, institutional, political, and social transformations. And they look for them to develop the future leaders of society at every level.

All this gives our centers of learning a critical role in Egypt’s already rich and inspiring history. It is a privilege for AUC and other universities in Egypt. It is also a huge responsibility.

I have no doubt that, with sustained effort and steadfast commitment, you will deliver; and do with pride and excellence.

Speaking today at an academic institution, I could — and should — support this assertion with a well-formulated theoretical foundation, empirical evidence, and peer analysis. I should, but I will not.

Instead, I will illustrate it with two very down-to-earth analogies that reflect the importance of never forgetting the insights of simplicity.

The first comes from the 1980s. I was traveling from Cairo to New York on the direct, non-stop EgyptAir flight. We left Cairo 5 hours late, had an uneventful flight, and experienced the perfect landing that Egyptian pilots are internationally renowned for. Sitting next to an American, we did not exchange a single word during the 10-hour-plus flight — that is, until we landed.

Just after the wheels touched down incredibly smoothly, this gentleman turned to me and said “typical Egypt.” “Excuse me?” I responded. He repeated “typical Egypt.” And then went on to share with me an explanation along the following lines: “Leave Egyptians to do things on their own, and they will deliver a world class outcome. That is why we had such a perfect landing. But place them in an inefficient system, and the outcome is far from world class; and that is why we are five hours late.”

This EgyptAir story is illustrative of the fact that there are many examples of Egyptians shining in the toughest of worldwide competitions. It is about a Naguib Mahfouz and an Ahmed Zewail winning Nobel Prizes. It is about Egyptian doctors that are among the very best healers in the most respected hospitals around the world. It is about Egyptian professors that are first-class educators and researchers. It is about Egyptian artists who bring music, movies and art to millions. And it is about Egyptian football stars helping their teams win league championships in tough national and regional competitions.

Speaking of football, allow me to share the second simple analogy. This one comes from my childhood.

Growing up in Egypt, I was always among the very last kids to be picked for a soccer team at primary school. And sometimes, I would not be picked at all. Instead, I would be asked to stand behind the goal to retrieve the balls rather than play on the field.

Well, as a 10-year-old, I followed my father to New York as he assumed his post at the Egyptian Mission to the UN. I joined a school there and, quickly, I became the captain of the class soccer team.

Now it could be that I experienced some remarkable transformation during the trip to New York. I did not. The reality is that, back then, Egyptians were simply better at the sport.

I share with you these simple stories because I believe that Egypt, led by Egyptians, is today at a very special juncture.

Egyptians have a remarkable opportunity to shape a new and better destiny for their country. And the rare combination of both willingness and ability comes wrapped in a new sense of purpose, energy and engagement on the direction of the country.

Owing to the tremendous sacrifices of its many heroes, Egypt is in the midst of a revolution — a truly transformational moment in a history that goes back over seven millennia. We thank all those that bravely took to the street, forming a movement that helped all Egyptians overcome decades of fear. In the process, they united Egyptians of all ages, social classes, and religions around a simple aspiration of a better tomorrow.

To use a song that I came across when watching a wonderful American television (“60 Minutes”) interview with Wael Ghonim, and one that has been played many times in our home and at presentations that I have made in the U.S. on the Egyptian revolution-Sout el Horreya, or the Voice of Freedom sung by Hany Adel and Amir Eid: “Our dreams were our weapon…[and] all barriers have been shattered.” And to use New York Times columnist Tom Friedman’s characterization, what was delivered was a revolution “made in Egypt, by Egypt, for Egypt.”

But most revolutions are not discrete events; they are transformational processes. They are seldom easy; they can take many months and years; and the first, most visible part of a successful revolution — that of overthrowing a regime — is often a necessary condition for a successful revolution; but this huge and courageous step alone is not sufficient. It improves the probability of achieving the objective of the revolution — that of a better society for all of Egypt — but it does not guarantee success.

In today’s Egypt, the required transformations involve challenges that cut across politics, economics and finance. They have important social and geo-political dimensions. And they operate in fluid regional and global contexts. And they will not happen without continued steadfast commitment. Each of these realities is extremely complex.

Think about the challenges inherent in altering the structure of an economy so that it can deliver in a decisive and lasting manner the combination of more inclusive economic growth, greater poverty alleviation, improved international competitiveness, and low inflation.

Think of the importance of reaching the most vulnerable segments of the population in a timely manner — providing better access to education, health, nutrition and other essential social services.

Think of the challenges of keeping the country’s finances in order at a time of reduced tourist receipts, lower remittances from workers in Libya and elsewhere, and high food and commodity prices in international markets.

Think of the challenges of constructing an open and transparent political process after many decades of repression, suppression, and too much control by too few.

And think of the importance of institutions. As Jean Monnet, the famous French father of European unity, observed: “Nothing is possible without men and women, but nothing is lasting without institutions.” Egypt today faces the complex challenges of quickly adapting and building institutions that are credible and efficient.

None of these are easy; and the significant degree of difficulty compounds quickly when the challenges interact, as is the case in Egypt today.

It is tempting for a nation and for a society to feel overwhelmed by all this. Today’s Egypt should not. These are all surmountable challenges, especially if the country retains its unity, commonality of purpose, and purity of aspiration.

It may also be tempting for some of you here to feel powerless, believing that your own potential contributions pale in comparison to these significant societal challenges. You should not.

Every single one of you has the ability to make a difference in today’s Egypt. Indeed, many of you already do so, day in and day out.

You maintain the momentum for positive change. You work hard to counter the huge disparities in income and wealth, and the extremes in access to education, health and other basic social needs. And you are unwilling — and rightly so — to see millions of your countrymen and countrywomen condemned to a life of poverty, human degradation and despair.

All of you are facilitators of a better tomorrow for Egypt, of the “new Egypt.”

Indeed, nothing gives me greater joy than to hear all the stories of Egyptians volunteering to make a difference in a village, in a slum, in a school that has insufficient books, and in a hospital overwhelmed by patients.

Just a few months into Egypt’s revolution, we see concrete changes on the ground. And it is not just about new political parties, broad-based national debates, and a more generalized sense of empowerment to influence the country’s outlook. It is also about multiple daily wins.

It is about young volunteers adopting villages and neighborhoods to help make a difference on the ground. It is about individual Egyptians, like Wael Ghonim, setting up NGOs to improve the future of other Egyptian families. And it is about true visionaries, such as Ahmed Zewail, who is inspiring and leading a national project to help Egyptian society attain the scientific and technological advancements that are so essential to sustain growth, poverty alleviation and employment creation in today’s rapidly changing global economy.

AUC has also been at the forefront of change. New courses have been created to put the revolution in context, both historical and forward looking. New initiatives, such as the Tahrir Dialogues, are part of an effort to help “build a better Egypt.” Public seminars are being held to encourage debate among the many and facilitate civic and political participation. And web-based approaches are being used to facilitate volunteerism and community service.

A lot is already being done; and a lot, lot more will need to be done.

To be associated with a university in Egypt today is to occupy a very special and important place. Whether you are members of the student body, educators or administrators, you should always remember that privilege comes with enormous responsibility.

As John F. Kennedy once said, “To those whom much is given, much is expected.” And Egyptians living outside Egypt, like me, are committed to help you and others in whatever way we can to ensure a truly successful revolution and a better Egypt for current and future generations.

This is adapted from a commencement speech delivered at the American University in Cairo on June 16, 2011.

By Mohamed El-Erian
The opinions expressed are his own.

Very few of us like to be confronted with unpleasant choices. If we are, we will tend to delay a decision. And if forced to make one, we will likely opt for the choice that, in our minds at least, seems less disruptive upfront — even if we know it is likely to involve discomfort down the road.

This simple human analogy is critical in understanding why Europe’s increasingly ugly debt crisis refuses to go away. It sheds light on the choices made up to now; and it speaks to why an increasingly incoherent policy response will likely end up in tears for Greece and potentially other European economies and institutions.

Let us wind the clock back to just over a year ago when Europe first bailed out Greece, a country no longer able to pay its bills. Together with two monetary institutions — the European Central Bank and the International Monetary Fund — European politicians faced unpleasant choices and had to respond. But rather than decisively addressing the problem, they essentially opted to kick the can down the road.

There were, and still are two main reasons for Greece’s predicament: The country borrowed way too much; and it failed to grow its economy on a sustained basis. This lethal combination was amplified by weak public administration.

Yet the rescue of Greece involved making new loans to the country and was asking for a very ambitious fiscal adjustment effort. Neither the size of the debt nor growth reinvigoration were properly addressed.

I suspect this choice was not driven by a strong conviction that the approach would work. Rather, decision makers feared the complexity of the alternative which involved opting for a pre-emptive, and hopefully orderly debt restructuring, and placing much greater emphasis on structural reforms.

A year later, Greece is still in the financial intensive care unit, and needs renewed urgent attention by the “troika” of doctors — from the European Commission, ECB and the IMF.

Regrettably, the country’s condition is even more serious now, with every single one of its vitals worse than projected by these same doctors a year ago.

The economy has contracted by more than programmed: unemployment is higher, debt and deficit dynamics are worse and, with market risks measures of spreads at even more alarming levels, the country is further away from restoring access to normal capital market financing.

Understandably, the Greek government is under intense pressure at home from a population that is being asked to sacrifice tremendously but sees virtually no improvements on the horizon. Coordination among lenders is becoming more difficult as two related concerns fuel ever-growing bickering: what has happened to all the money that has already been disbursed? And, why are so many dubious liabilities being transferred to taxpayers from private creditors, who were paid an interest rate premium to take an informed risk?

No wonder Europe’s approach to its debt crisis is losing credibility. In the process, the institutional integrity of some key institutions is being undermined.

This is particularly true for the ECB which now finds its balance sheet saddled with billions of Euros of Greek bonds. Some were purchased in a failed attempt to counter the surge in Greece’s risk spreads; others are related to repo operations that have kept afloat an essentially bankrupt Greek banking system.

When you think of it, none of this should really come as a surprise to Europe’s decision makers. At its root, the approach to solving Greece’s excessive debt problem was to pile new debt on top of old debt; and the accompanying medication served more to reduce growth than improve the structural drivers of a sustained economy expansion.

Despite this obvious diagnosis, the doctors are essentially at it again; and the patient, already weakened, is forced to commit to yet greater sacrifices. Thus, Greece will get more debt-creating financing in exchange for even larger fiscal austerity.

However, it is not entirely all déjà vu. It seems that there will be two tweaks in the days ahead.

The first, involving a more structured privatization initiative, will look good on paper but is unlikely to deliver much. The second is more promising, if pursued properly. It entails “convincing” private creditors to renew their maturing loans to Greece rather than exit completely.

Notwithstanding these modifications, I fear that this new rescue of Greece will, again, only kick the can down the road. It will not materially improve Greece’s solvency outlook; nor will it do much to promote growth and employment. What it will do is fuel more social unrest in Greece and intensify tensions within the official creditor community.

There is one silver lining here. In again opting for the seemingly easier but ultimately unsustainable choice, the troika is giving other potentially vulnerable parts of Europe more time to get their house in order — thereby reducing contagion risk.

Some countries, like Spain, are taking advantage of this window. Under the guidance of the central bank, the savings banks (“cajas”) are getting serious about strengthening their capital buffers. Such capital raising should be pursued aggressively by more banks across the Euro-zone. And, hopefully, the ECB is discussing how to navigate its weakened balance sheet through the minefield of an inevitable Greek debt restructuring.

So is this tradeoff — persisting with a costly approach for Greece in order to buy time for the rest of Europe — worth it? As much as I would like to say yes, I worry that the answer is likely to be no.

First, Greece is not the only country in this highly unfortunate situation. Ireland and Portugal face similar debt and growth challenges, though somewhat less severe. Given that the troika is applying the same remedy there too, the overall cost of this unsustainable approach is even larger.

Second, the money being transferred to private creditors could be used more efficiently in safeguarding the European system directly, thus reducing vulnerability to contagion risk.

Finally, the viability of simply kicking the can down the road is undermined by growing cooperation challenges — between Greece and the troika, and within each group in this tragedy.

As Europe finalizes its new bailout of Greece over the next few days, it would be well advised to keep these considerations in mind. It is not too late to correct the course, and opt for a choice that is unpleasant upfront but offers a greater chance of success over the longer term.

Photos, top to bottom: Protesters raise arms in front of the Greek parliament during a rally against austerity economic measures and corruption in Athens’ Constitution (Syntagma) square June 5, 2011. The protest, on its twelfth day, was organized through a Facebook group called “The Indignant”. REUTERS/Pascal Rossignol; Employees of the Hellenic Postbank push a mock money box during a rally against government’s privatisation plans in Athens June 2, 2011. Greece wants to sell its entire 34 percent stake in the lender by the end of the year as part of a goal to raise 50 billion euros by 2015 to pay down its debt mountain. REUTERS/Yiorgos Karahalis

By Mohamed El-Erian
This piece is the English version of the one that appeared in Handelsblatt. The opinions expressed are his own.

Not a day goes by without a flood of comments on Greece and its debt problems. They seem to come from everywhere. Some are later denied while others are left to stand, accompanied by a continuous string of worrisome data. In the process, even greater disorder is gaining hold of the country’s debt markets, with credit spreads exploding in an ever more alarming fashion.

There is a risk that all this could serve to confuse rather than illuminate the key issues that should be on the radar screen of many, whether they are policymakers or normal citizens. I can think of five such issues.

First, there is a good reason why Europe’s current approach to Greece's problems has not worked well. Indeed, many, including me, believe it will not work any better going forward. Meanwhile, the costs and risks are growing exponentially.

Despite a year of large sacrifices on the part of Greek society and exceptional financial support from neighbors, Greece is still very far from regaining economic and financial stability. Output continues to collapse, unemployment is rising, the budget deficit remains alarming, and the already excessive debt burden is increasing further.

As a result, the country is no closer to re-establishing normal access to the global financial markets. New investors prefer to wait on the sideline, thereby starving the country of fresh capital. Meanwhile, doubtful liabilities are increasingly being transferred from creditors, who knew they were taking risks in lending to Greece (rather, for example, than buy German debt at a lower interest rates), to Greek and European tax payers as well as to the balance sheets of public organizations.

Second, the time has come to urgently recalibrate the EU/ECB/IMF approach to solving Greek’s debt crisis. This must start with an open recognition that an insufficient number of the original key objectives of the Greek adjustment program have been realized and, going forward, even fewer stand any realistic chance of being realized under the current approach. As a result, the country will not be able to harvest gains from the courageous steps taken to improve the efficiency and functioning of the public sector. Indeed, it could be forced to reverse them.

This is not to say that the approach has been a complete failure. It has not, especially given that it reduced regional contamination risk by giving time to other vulnerable entities in Europe to enhance their economic and financial defenses. This has been particularly important for Spain and for those banks that have taken advantage of the last year to raise capital.

Third, none of this should really constitute a total surprise. Indeed, a lot, though not all, is very familiar to those that lived through or studied the Latin American crisis of the 1980s. It is also consistent with lots of academic work on debt traps and solvency problems.

The basic issue is a simple one. You don't solve a debt problem using mainly a liquidity approach.

Piling new debt on top old of debt is not a durable solution. At best, it buys time. But this comes at a cost. For example, Latin America suffered a "lost decade" of growth, employment and investment in the 1980s. Greece is undergoing the same risk today. But there is also a critical difference that makes today's approach to Greek's debt crisis even more problematic over the long term.

In Latin America, the international community was able to force banks to continue to lend. This limited the transfer of doubtful liabilities to the public sector. And, when the time came for a debt restructuring, the banks suffered a haircut of over 50 percent

In the case of Greece today, too much of the debt is being transferred from creditors to the public sector. As a result, too many tax payers and public institutions will end up taking the hit that many creditors should have taken.

Fourth, the urgent recasting of Europe’s current approach to the Greek debt crisis must focus more explicitly on the objectives of addressing the country’s solvency problems, restoring medium term growth and employment creation, and stopping the erosion in the integrity of European and multinational institutions.

In Greece, austerity must be mixed with more meaningful structural reforms that restore the country's competitiveness and growth potential. The approach to the country's debt must mix liquidity with solvency solutions, preferably (and if still possible) through a voluntary and orderly debt restructuring. European and multilateral financial support should be better targeted, structured, and disbursed; and it should reside on fiscal balance sheets rather than those of monetary institutions. And reasonable and sustainable fire lines must be established to limit regional contagion.

This leads to the fifth and final issue. If urgent action is taken, Greece need not end up risking the very concept of the Euro zone.

It is unfortunate that the Greek debt saga has diverted attention from many positives that are in play today in the Euro-zone. I am thinking here of Germany's underlying economic strengths and achievements, earned through years of brave structural reforms. I am also thinking of the considerable efforts made by Spain to avoid being placed in the difficult dilemma that Ireland was put in—efforts that are critical to Spain limiting the risk of it joining the ranks of the three struggling peripheral economies (Greece, Ireland and Portugal).

The time has come for Europe to recognize the need for a meaningful mid-course correction to its approach to the Greek debt crisis. The current approach has not worked well enough, and will do even worse going forward.

The longer European leaders ignore the fundamental issues, the greater the risk to Europe’s institutions, to its credibility, and to its shared strengths and responsibilities. And, the greater the risks to the global economy.

By Mohamed A. El-Erian
El-Erian is the CEO of PIMCO. He spent part of his childhood in Egypt where his father was a professor of international law at Cairo University and then served as an Egyptian diplomat and was elected to the International Court of Justice in 1978. The opinions expressed are his own.

For centuries, songs have provided populist narratives of historical movements. And, every once in a while, a song comes along that also succeeds in capturing forcefully the raw emotions of the moment. This is the case today with "Sout el Horeya," or the "Voice of Freedom," sung by Hany Adel and Amir Eid.

Coming out of Egypt, this song skillfully encapsulates the strong drivers behind the ongoing transformations impacting the Middle East and North Africa. It is a "must hear" for all those trying to understand previously-unthinkable developments in the region, including western governments whose sophisticated intelligence services have been caught flat-footed and are now playing rapid catch up.

In powerfully plain language, the song speaks to the what, why and how of the Egyptian revolution. In a post on YouTube, the video version opens with images of peaceful protests in Cairo's Tahrir (Liberation) Square. The intention is a simple one -- to remind us all that what is in play is a secular revolutionary movement involving citizens of all ages, classes and religions. This is not a movement that can be derailed by diversionary tactics seeking either to blame foreign involvement or to threaten the alternative of a repressive Islamic theocracy.

After visually reminding us of what Tom Friedman (one of the very best western commentators on the region) called a revolution made "in Egypt, by Egypt, for Egypt," the lyrics of the song convey a simple message: "In every street in our country, the voice of freedom is calling."

This dominant refrain is placed in a context that all those formulating policies must not forget. "For a long time we have been waiting," "searching yet unable to find our place." Suddenly, "barriers have been shattered" and our "rights are the most important pursuit." And, in pointing to "the clarity of tomorrow," the lyrics speak to "our weapon is our dreams."

Toward the end of the song, a poem is superimposed praising Egypt's youth for converting "winter to spring" and for delivering a "miracle that awoke a deadened nation." The accompanying set of still photos is a reminder of the sacrifices made and of the supportive and highly-appreciated role of the Egyptian armed forces.

Egypt's new policymakers, including the Cabinet formed over the weekend, would be well advised to internalize these messages as they guide the country on its new path towards greater democracy and individual freedoms. This is also true for Egypt’s allies and friends that are stepping up to try and help the country, after having been unexpectedly marginalized by a domestic movement that neither requested nor needed foreign assistance.

The song should also be of interest to countries elsewhere in the region. It has relevance for reforming governments that are seeking to proactively meet the awakened and legitimate aspirations of their people. It is also important for those that, erroneously and tragically, think that their old notion of overwhelming force can deny an energized movement willing to die for a better tomorrow for their children.

"Sout el Horeya" provides us all with concise and powerful insights into historical developments in an important part of the world. Let us hope that its messages are never far from the minds of those entrusted with the well-beings of millions in the Middle East and North Africa. If they are ignored, this will only delay the inevitable while greatly increasing human suffering and, in some cases, dangerously increasing the disturbing probability of failed states.

By Mohamed A. El-Erian
El-Erian is the CEO of PIMCO. He spent part of his childhood in Egypt where his father was a professor of international law at Cairo University and then served as an Egyptian diplomat and was elected to the International Court of Justice in 1978. The opinions expressed are his own.

While Egyptians are yet to specify the final destination for their revolution -- and only they can, and should do so -- there is little doubt in my mind that the country is now on a new, bold and uncertain road toward greater democracy and individual freedoms. The next few days and weeks will be critical in determining the journey for a country that is central to the stability of the Middle East.

Undoubtedly, domestic political developments hold the key to what will happen. Egyptians need to converge on a common understanding and vision of "managed change". And this vision must satisfy the millions of Egyptians -- from all ages, religions and walks of life -- that unite in Tahrir (Liberation) Square and elsewhere to better influence and improve their destiny.

Yes, street and state politics are the undeniable drivers today. This will involve both upheavals and compromises. Yet economics and finance will also play a crucial role, especially when it comes to the urgent recovery of an economy that has experienced one of the most dramatic "sudden stops" in recent history. In the process, this will also define how Egypt's friends and allies can come off the sidelines and help the country's unprecedented transformation.

For two weeks, economic activity was at a virtual standstill. Supplies dwindled. Banks and many shops closed. ATMs ran out of cash. Schools and offices were shut. Domestic and international trade was disrupted. Tourism evaporated.

Egypt's economy will need to restart and reset. Three factors stand out in a process that is critical for the longer-term well-being of the country, including the millions of Egyptians that are protesting for greater freedoms.

First, Egypt's banking system must resume normal operations in an orderly fashion. A very good start was made on Sunday to bring part of the system back on line, and important challenges remain.

The central bank has no choice but to flood the financial system with both domestic and dollar liquidity. And both the central bank and the commercial banks must continue to avoid the temptation to overly curtail deposit withdrawals lest that, in itself, fuel a deposit run.

Second, the Finance Ministry must deal properly with the unanticipated collapse in tax revenues. It must make sure that this temporary interruption in government receipts does not lead to even more destabilizing spending disruptions. Salaries must be paid promptly, and all supplier bills must be met.

Third, particular emphasis must be placed on targeted social spending, particularly when it comes to health, food subsidies, and shelter. Remember, Egypt's poor are extremely vulnerable to the current economic and financial dislocations.

The challenge of such an orderly reset is an enormous one. It cannot be met easily by Egyptians alone. They will need help; and their courage and determination warrant international support.

Assuming a satisfactory political resolution, Egypt's friends and allies will have a chance to support the country's economic recovery. In particular, they should stand ready to provide central bank swap lines, as well as to significantly accelerate and redirect aid in the pipeline. And they should actively facilitate the involvement of institutions that already have effective links and extensive networks among the most vulnerable segments of Egyptian society.

A historic grass root movement has made massive sacrifices by taking to the street to bring greater democracy to the most populous country in the Middle East and North Africa. The movement has endured tremendous pain and taken enormous risks. Let their brave historic efforts be reinforced by properly resetting an economy that has been subjected to a dramatic sudden stop.

Photo, Top: An anti-government protestor shouts anti-Mubarak slogans after Friday prayers at Tahrir Square in Cairo February 4, 2011. REUTERS/Mohamed Abd El-Ghany

Bottom: Anti-government protesters carry a big Egyptian flag after Friday prayers at Tahrir Square in Cairo February 4, 2011. Tens of thousands of Egyptians prayed in Cairo's Tahrir (Liberation) Square on Friday for an immediate end to President Hosni Mubarak's 30-year rule, hoping a million more would join them in what they called the "Day of Departure" . REUTERS/Amr Abdallah Dalsh

By Mohamed El-Erian
The opinions expressed are the author's own.

It is safe to say that there is broad agreement on what is most desirable for solving the Irish crisis -- namely a mix of domestic policies and external financing finely calibrated to enable the country to grow strongly, create jobs, stabilize the banks, and overcome large and mounting indebtedness.

Unfortunately, what is most desirable is not feasible given the path Europe is embarked on; and, to make things even more complicated, what appears feasible to Europe is not necessarily desirable. As a result, Ireland finds itself stuck in an unstable muddled-middle. It can't get ahead of the crisis; it is far from a first best solution; and it confronts choices that are painful to implement and uncertain in outcome.

What is evolving in Ireland today resembles what was done in Greece six months ago. Expect the Irish government to commit to even greater budgetary austerity, its European neighbors and the IMF to provide massive funding, and the banks to receive liquidity, capital injections and other unconventional forms of support.

While seemingly exceptional to many, this approach constitutes the path of least resistance. In fact, it is the most feasible. But we should not confuse feasibility with desirability.

At its roots, the approach addresses liquidity but not solvency. It adds to the debt overhang rather than reducing it. And it uses the socially-painful method of income and growth compression as the principal way to promote international competitiveness over time.

It should come as no surprise that, six months after having embarked on such an approach, Greece is still in crisis mode. Risk spreads remain at elevated levels that discourage new investment. Society faces a higher-than-programmed contraction in economic growth and poorer employment prospects. The government is forced into even greater fiscal austerity. Meanwhile, private creditors have been using the exceptional support provided by the EU/ECB/IMF to exit their Greek exposures rather than co-invest with the official sector.

At some stage, Europe will need to find a better way to reconcile desirability with feasibility. It needs alternative approaches that, while also falling short of a first best, could prove more effective in overcoming the debt overhang, restoring competitiveness, and facilitating pro-growth economic re-structuring.

Inevitably, these alternatives will push national and regional policymakers out of their comfort zone. In a wider policy debate, debt restructuring would be considered as a possible pre-emptive option rather than a disorderly inevitability; thought would be given to the possibility of the weakest Euro-zone members taking a type of sabbatical from the club and rejoining on a stronger and more sustainable basis.

Time is of essence. Europe must give serious consideration to a wider range of approaches. It is in a good position to do so given the undeniable strength of core Euro-zone countries, anchored by a fiscally sound and economically robust Germany.

In this much-needed wider debate, none of the options on the table would be easy or risk free. Yet the longer it is postponed, the greater the risk that the peripheral European problems will spread further and, in the process, the region as a whole will lose out in terms of both what is desirable and what is feasible.

Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of a New York Times/Wall Street Journal bestseller "When Markets Collide" (2008).

Photo: Mohamed El-Erian. REUTERS/Daniel Munoz