Debt Deal Leaves Risk of Cut in U.S. Credit Rating, Pimco’s Kashkari Says
The debt-limit compromise passed by Congress and signed by President Barack Obama leaves the U.S. at further risk of a reduction in its top credit rating if politicians don’t reduce the deficit, according to Pacific Investment Management Co.’s Neel Kashkari.
“No one is touching entitlements, no one is touching tax reform, and we have yet another commission,” Kashkari, head of new investment initiatives at Pimco, said in an interview on “InBusiness With Margaret Brennan” on Bloomberg Television. “Do we really need another commission to realize that we just need political courage to make hard choices?”
Obama signed the bill to raise the U.S. debt limit by at least $2.1 trillion, averting by hours a first-ever U.S. financial default. The president signed the debt legislation at the White House after the Senate approved it today, ending weeks of partisan battles over raising the debt ceiling. The House passed it yesterday.
The debt legislation raises the $14.3 trillion debt ceiling enough to fund the government until 2013 and threatens automatic spending cuts if a bipartisan congressional committee doesn’t identify reductions that Congress will accept.
The U.S. may lose its top credit rating because unfunded entitlements such as Medicare and Social Security threaten the nation’s long-term fiscal health, said Kashkari, who joined Pimco in December 2009 after serving as head of the Treasury Department’s bank-rescue program.
Fitch Ratings said in a statement today that the U.S. remains under a review as the nation’s debt burden increases at a pace that isn’t consistent with an AAA sovereign credit rating. Fitch said it expects to complete the ratings review by the end of August after Congress approved the debt-limit accord.
Treasury 30-year bonds rallied after the Senate approved the debt ceiling. Yields dropped as much as 17 basis points, or 0.17 percentage point, the most since May 2010. The yields fell below 4 percent for the first time since November.
Standard & Poor’s placed the U.S. AAA rating on “CreditWatch” on July 14, saying there’s a 50 percent chance it would be cut within 90 days even if an agreement is reached by
All fiscal options need to be explored to address U.S. debt turmoil, and the legislation passed in Congress delays the resolution to the crisis, according to Kashkari.
“If we wake up one morning and all of a sudden people realize, ‘Well, wait a second, they’re not risk-free, we’ve taken on more risk than we’ve realized,’ that could trigger a new financial crisis, and that could be really destabilizing for the global economy,” Kashkari said.
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