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El-Erian Says Debt Default Might Be ‘Catastrophic’

PIMCO CEO Mohamed El-Erian
Mohamed El-Erian, chief executive officer and co-chief investment officer of Pacific Investment Management Co. (PIMCO). Photographer: Gillianne Tedder/Bloomberg

June 26 (Bloomberg) -- Pacific Investment Management Co. LLC Chief Executive Officer Mohamed El-Erian said a short-term default by the U.S. on its debt might have “catastrophic” legal consequences.

“We would be in the land of the unpredictable” if lawmakers fail to reach an agreement to raise the $14.3 trillion debt ceiling and the U.S. misses a payment “simply because of the technical linkages,” El-Erian said in an interview on CNN’s “Fareed Zakaria GPS” program, scheduled to air today.

U.S. lawmakers are seeking a path to increasing the debt limit and to cutting at least $1 trillion from the long-term deficit before an Aug. 2 deadline. President Barack Obama plans to hold separate meetings at the White House June 27 with Senate leaders Nevada Democrat Harry Reid and Kentucky Republican Mitch McConnell in an effort to break an impasse that scuttled a seven-week negotiating effort led by Vice President Joe Biden.

“My advice is please try and get together and solve this issue in the context of a medium-term reform package,” El-Erian said. “If you can’t do that and you’re going to kick the can down the road, kick the can rather than face something that could be catastrophic in terms of legal contracts being triggered.”

Pimco, the world’s biggest manager of bond funds, sees more value in non-U.S. government bonds than U.S. Treasuries as the Federal Reserve prepares to end its $600 billion bond-repurchase program this month, El-Erian said. Pimco, of Newport Beach, California, is a unit of the Munich-based insurer Allianz SE.

“A basic rule as an investor is don’t buy something unless you know who else is going to be buying,” he said. “So when we look at Treasuries, we see the big buyer stepping away from the market, for certain. And we ask the question, who else is going to be buying at these levels, and we can’t identify another buyer of the size of the Fed.”

El-Erian said the U.S. fiscal problems are dwarfed by those of Greece, whose debt reached 143 percent of gross domestic product last year.

“It is inevitable that Greece would have to restructure its debt,” he said. “Greece has two problems: it has too much debt and it cannot grow. And until these problems are solved, more and more of Europe is going to become contaminated.”

Europe has been treating Greece “not as a solvency issue, but as a liquidity problem,” El-Erian said. “We had a massive bailout a year ago in Greece, massive. A year later, every single indicator in Greece is worse off.”

-- With assistance from Heidi Przybyla, Julianna Goldman, Cheyenne Hopkins and Ian Katz in Washington. Editors: Ann Hughey, Christian Thompson.

To contact the reporter on this story: Molly Peterson in Washington at mpeterson9@bloomberg.net

To contact the editor responsible for this story: Ann Hughey at ahughey@bloomberg.net

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