Pimco’s El-Erian Says U.S. Vulnerable to Downgrade Even If Default Avoided
Pacific Investment Management Co. CEO Mohamed A. El-Erian
Jonathan Alcorn/Bloomberg
Pacific Investment Management Co. chief executive officer Mohamed A. El-Erian.
Pacific Investment Management Co. chief executive officer Mohamed A. El-Erian. Photographer: Jonathan Alcorn/Bloomberg
July 25 (Bloomberg) -- Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., talks about the debt ceiling debate and the possibility the credit ratings agencies will downgrade the U.S.'s AAA credit rating. El-Erian, speaking with Betty Liu, Sara Eisen and Jon Erlichman on Bloomberg Television's "In the Loop," also discusses the impact a debt default may have on the economy and investment strategy. Kevin Rendino, fund manager at BlackRock Inc., also speaks. (Source: Bloomberg)
July 25 (Bloomberg) -- The U.S. may lose its AAA credit rating even if lawmakers reach a plan to avoid a default, said Mohamed A. El-Erian, whose Pacific Investment Management Co. manages the world’s biggest bond fund. Matt Miller reports in today's Movers and Shakers on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
The U.S. government may lose its AAA credit rating even if lawmakers reach a plan to avoid a default, said Mohamed A. El-Erian, whose Pacific Investment Management Co. is the world’s largest manager of bond funds.
“In most likelihood, a last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable,” El-Erian, 52, the Newport Beach, California-based chief executive officer and co-chief investment officer at Pimco, wrote in an e-mail. “Stock markets around the globe will look to price in a greater uncertainty premium on account of political squabbles in the world’s largest economy and the increasing risk that it may lose its sacred AAA rating.”
House Speaker John Boehner plans to press ahead with a shorter-term increase in the U.S. debt limit than President Barack Obama has requested, he told lawmakers yesterday, defying a veto threat and signaling continued stalemate in the Congress as time runs short for a deal. The impasse has boosted the chance Standard & Poor’s will lower the U.S. credit rating from AAA within three months to 50 percent, the company said July 21.
Treasury Prices
Ten-year Treasuries fell, extending last week’s drop, as Republicans and Democrats prepared dueling plans for raising the U.S. debt ceiling, unable to break a partisan stalemate. Yields on benchmark 10-year notes rose six basis points, or 0.06 percentage point, to 3.02 percent as of 10:02 a.m. in New York, according to Bloomberg Bond Trader prices, after climbing six basis points last week. That’s still below the five-year average of 3.72 percent. Thirty-year yields climbed five basis points.
U.S. stocks slid today, with the S&P 500 Index down after rallying within 1.4 percent of a three-year high, as failure to raise the federal debt limit intensified concern of a default. The benchmark gauge for U.S. stocks lost 0.6 percent to 1,336.53, while gold futures earlier reached a record of $1,624.30.
El-Erian said in an interview today on Bloomberg Television’s “In the Loop” with Betty Liu that it will be a “big, big mess” if the U.S. defaults, spurring a sell-off in equities, the U.S. dollar and commodities excluding gold.
‘No Other Country’
“Remember there is no other country that can step in to replace the U.S.,” he said in the interview. “The U.S. is the supplier of the reserve currency. The U.S. is the provider of a financial system that intermediates other people’s savings and investments. The U.S. is a AAA. The question is whether the U.S. can maintain a AAA.”
El-Erian said that while “risk assets” would eventually rebound even if the U.S. were to default, investors should be cautious before buying them, particularly in the two to three days after the event, because of other uncertainties such as the European debt crisis.
Boehner told rank-and-file Republicans during a conference call yesterday that they needed to pull together as a team to block Obama, who has asked for a $2.4 trillion borrowing boost in the $14.3 trillion debt ceiling, from obtaining the money all at once, without any guarantees of spending cuts. His remarks were described on condition of anonymity by a person familiar with the discussion.
Total Return Fund
Pimco’s $243 billion Total Return Fund, managed by Bill Gross, has returned 3.76 percent this year, beating 68 percent of its peers. The company revised how it listed asset holdings last month to show that its flagship fund held U.S. government debt. Gross boosted the fund’s investment in the securities to 8 percent of assets in June from 5 percent in May, according to a Pimco report this month.
The U.S. economy probably expanded in the second quarter at the slowest pace in a year as higher fuel costs crimped consumer spending and supply disruptions limited production, economists said before a report this week. Gross domestic product rose at a 1.8 percent annual pace after a 1.9 percent gain in the previous three months, according to the median forecast of 69 economists surveyed by Bloomberg News before the Commerce Department’s July 29 report.
“The debt ceiling debacle unambiguously translates into an intensification of the already-strong headwinds facing U.S. growth and employment creation,” El-Erian said in the e-mail.
To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
Rate These Stories
Rate this Page