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U.S., Greece, Spain Are in Debt Risk ‘Ring of Fire,’ Pimco Says

Average euro-area budget gap will widen to 6.6% of GDP
The Greek, left, and Spanish one euro coins. Photographer: Denis Doyle/Bloomberg

The U.S., Spain and Greece are among developed nations whose borrowings put them in a “ring of fire” amid sovereign debt concerns, said Pacific Investment Management Co., which runs the world’s biggest bond fund.

The company is investing in emerging markets that will benefit from high savings rates, the absence of debt bubbles and a greater capacity for government spending, said John Wilson, head of the Australian unit of Newport Beach, California-based Pimco, in an e-mailed statement today. The fund manager is targeting bonds including those in Brazil, Mexico and Russia and retaining holdings of inflation-linked Australian debt, he said.

“While the support declared by European leaders and the International Monetary Fund quelled concerns of sovereign risk spreading, Greece’s ability to refinance near-term debt remains a risk,” said Wilson. “Other developed countries in this ‘ring of fire’ are Ireland, Spain, France, U.S., U.K., Italy, Portugal and Japan.”

Policy makers across Europe are discussing how to bring members of the currency union back into line after widening deficits culminated in a sovereign debt crisis that forced them to put together a 750 billion-euro ($938 billion) emergency aid package to calm markets.

The average euro-area budget gap will widen to 6.6 percent of gross domestic product this year from 6.3 percent in 2009, the European Commission forecasts.

Australian Rates

In Australia, the benchmark interest rate is likely to rise to 4.75 percent or 5 percent by year-end, Pimco said. The Reserve Bank of Australia may “settle for a lower neutral” rate of 5 percent from 6 percent before the global financial crisis, Pimco said.

“We’re emphasizing intermediate maturities where rates aren’t as likely to rise as quickly as shorter-term issues,” Wilson said. “We’re also tactically gaining exposure to the one-year markets when investors price in too many rate increases.”

Swaps traders are betting RBA Governor Glenn Stevens will raise its benchmark interest rate by eight basis points over the next year, according to a Credit Suisse AG index. That’s down from bets on 69 basis points of increases over 12 months on May 5, a day after the RBA increased it target cash rate to 4.5 percent.

Pimco also holds more AAA tranches of Australian residential mortgage backed securities than benchmark indexes it follows would indicate, Wilson said.

The company is a unit of Munich-based insurer Allianz SE and it managed some $1 trillion of assets as of Dec. 31.

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