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Pimco’s Gross Clashes With Whitney Over Municipal-Bond Outlook

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Pacific Investment Management Co.’s Bill Gross
Pacific Investment Management Co.’s Bill Gross. Photographer: Andrew Harrer/Bloomberg

Jan. 12 (Bloomberg) -- Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co., clashed with Meredith Whitney, the banking analyst, when he said he doubted there would be many local-government bankruptcies.

“Ultimately, municipal bankruptcies will be at a lower level,” Gross said today on Bloomberg Television’s “InBusiness” program. “I don’t subscribe to the theory that there will be lots of them.”

Whitney, who correctly predicted Citigroup Inc.’s dividend cut in 2008, said on CNBC earlier today that she expected accelerated “outflows” from the municipal-bond market as state finances deteriorate in the next six months. Last month she forecast 50 to 100 “significant” municipal-bond defaults this year totaling “hundreds of billions” of dollars.

Gross, 66, said states will continue to face fiscal stress as long as Congress doesn’t subsidize them.

He praised Illinois’s passage of a 67 percent increase in personal income-tax rates early today to help close a $13 billion deficit equal to about half of this year’s spending and California Governor Jerry Brown’s efforts announced this week to close the state’s deficits equal to about 20 percent of spending.

Cities including Detroit and Harrisburg, Pennsylvania, have raised the prospect of bankruptcy. Still, the number of filings has declined. Six entities sought Chapter 9 protection under the bankruptcy code in 2010, compared with 10 in 2009, according to data compiled by James Spiotto, head of the bankruptcy practice at Chapman & Cutler, a Chicago law firm.

The biggest last year was a South Carolina toll road with more than $300 million in debt, he said.

Dimon’s Outlook

U.S. states will contend with about $140 billion in deficits in the next fiscal year, the Center on Budget and Policy Priorities, a Washington research group, said in a report issued Dec. 16.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, speaking yesterday at his company’s annual health-care conference in San Francisco, also said he expects more U.S. municipalities to declare bankruptcy and urged caution when investing in the public-debt market.

“There have been six or seven municipal bankruptcies already,” Dimon said. “Unfortunately you will see more.”

Job Losses

Whitney, 41, founder of New York-based Meredith Whitney Advisory Group, said she expected more than 1 million job losses among state and local governments.

“There have only been a couple hundred thousand so far,” Whitney said. “The biggest cuts will come approaching in the spring. That’s a difficult employment situation to get around.”

Workers employed by local government fell 0.1 percent to 14.2 million, the smallest number since September 2006, after cities, towns and counties cut 20,000 jobs, the U.S. Labor Department said last week in Washington. Total state payrolls were little changed at 5.2 million last month, the figures show.

Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE. Whitney didn’t immediately respond to an e-mail request for comment.

To contact the reporters on this story: Darrell Preston in Dallas at dpreston@bloomberg.net; Margaret Brennan in New York at mbrennan@bloomberg.net

To contact the editor responsible for this story: William Glasgall at wglasgall@bloomberg.net

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