U.S. Default Risk Is a ‘Fantasy,’ Former Soros Fund Manager Says

The risk the U.S. could end up in a Greece-type situation if lawmakers don’t reach a deal on budget-deficit cuts is a “fantasy,” according to Robert Johnson, a former managing director at Soros Fund Management.

“The idea we’re near some magical limit and the U.S. is near a place where we’re going to be Greece, that’s a fantasy,” Johnson, executive director of George Soros’ Institute for New Economic Thinking, said in an interview in London today. “It would take us about 30 years of being like Greece to get like that and that isn’t going to happen.”

Congress is wrangling over spending cuts and budget reforms as it seeks to reach a deal to raise the $14.3 trillion debt limit by Aug. 2, the date on which the Treasury Department said it will have exhausted its borrowing authority. Vice President Joe Biden said yesterday the “most important” thing is for the U.S. to show it can “handle difficult decisions.”

Johnson said President Barack Obama should spend money on investment programs to lower the nation’s 9.1 percent unemployment rate to help tackle the country’s debt levels in the longer term.

“Idle resources don’t pay taxes, so if you’re worried about the deficit in the next three years, which adds to the debt, we’ve got to get people back to work,” he said. “I would probably add fiscal stimulus in the next few years, but it would be a productivity-targeted adjustment program.”

Moody’s Threat

Moody’s Investors Service said on June 2 that it expects to place the U.S. government’s top credit rating under review for a possible downgrade if there’s no progress on increasing the debt limit by mid-July.

“I think you’re going to see a lot of theater and not a lot of action,” Johnson said, referring to the political deadlock in Congress. “They’ll bump and grind and do maybe a couple of temporary extensions. They’ll figure something out.”

“There are an awful lot of banks and insurance companies that do not want to see a U.S. downgrade or default where they’re supposed to throw all their safe paper out into the streets,” he said. “It’s not going to happen.”

Johnson, who managed global currency, bond and equity assets focusing on emerging markets at Soros Fund Management, ran a global currency fund at Bankers Trust Co. prior to that. He said the euro area’s debt crisis and the political wrangling over the budget in the U.S. will benefit Asian currencies.

Managing currencies is about trying to find the “lesser of evils,” he said. “It’s pretty hard to see a euro crisis smashing against the rocks as the least evil and it’s pretty hard to see that America’s going to do anything that makes the economy more vibrant.”

As a result, Johnson expects “upward pressure” on Asian and Latin American currencies “for the time being.”

“The Asian currencies -- the Singapores, the Malaysias, China -- that constellation is probably still substantially undervalued,” he said.

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