Pacific Investment Management Co LLC (PIMCO) chief executive officer Mohamed El-Erian said a short-term default by the US on its debt could have “catastrophic” legal consequences.
“We would be in the land of the unpredictable” if US lawmakers fail to reach an agreement to raise the US$14.3 trillion debt ceiling and the US 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 yesterday.
US lawmakers are seeking a path to increasing the debt limit and to cutting at least US$1 trillion from the long-term deficit before an Aug. 2 deadline. US President Barack Obama plans to hold separate meetings at the White House today with US Senate leaders, Democrat Harry Reid and Republican Mitch McConnell, in an effort to break an impasse that scuttled a seven-week negotiating effort led by US 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-US government bonds than US Treasuries as the Federal Reserve prepares to end its US$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 US’ fiscal problems are dwarfed by those of Greece, whose debt reached 143 percent of GDP 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. Until these problems are solved, more and more of Europe is going to become contaminated.”
Meanwhile, the US seems not to have awakened to the fast-looming debt crisis that could summon a new recession, imperil their stock market investments and shatter faith in the world’s most powerful economy.
Americans are divided on whether the debt limit should be raised, according to an Associated Press-GfK poll that found 41 percent opposed to the idea and 38 percent in favor.
Having said that, people are not exactly blase. A narrow majority in the poll expects an economic crisis to ensue if the US maxes out on its borrowing capacity and starts missing interest payments to creditors. However, even among that group, 37 percent still oppose raising the limit.
The survey found no significant differences by education, age, income, or even by party, in perceptions of whether a crisis is likely if the limit is not increased. There was widespread dissatisfaction with how Obama is dealing with the deficit — a new high of 63 percent disapproval on that subject — and an even harsher judgment of how both parties in Congress are doing on the issue.
The poll, was conducted June 16 to Monday last week by GfK Roper Public Affairs and Corporate Communications. It involved landline and cellphone interviews with 1,001 adults nationwide and had a margin of sampling error of plus or minus 4.1 percentage points.
Although 80 percent ranked the economy as poor, 63 percent also said the financial situation in their own household was good. Also, 70 percent predicted the economy will improve or stay about the same over the next year. A majority said it was a good time to put money into real estate.
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