Tags: Pimco | El-Erian | Downgrade | Threat

Pimco's El-Erian: Downgrade Threat is Still Very Real

Monday, 01 Aug 2011 01:09 PM

An agreement among Democrats and Republicans to lift the country's $14.3 trillion debt ceiling is positive in that it should end fears of a government default, but the possibility of credit downgrades is still out there, says Mohamed El-Erian, CEO of Pimco, the world's largest bond fund.

Credit ratings agencies have said the government could lose its AAA credit ratings due to its debt issues, although a deal between the two political parties appears to pave the way to raising the ceiling.

"The good news is the deal hopefully lifts this specter, this threat of default that was with us. What we don't know is what the ratings agencies, and one in particular S&P, will do."

Even if one ratings agency keeps the U.S. at AAA, a downgrade by another on the grounds that longer-lasting debt concerns remain unsolved can roil markets.

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Standard and Poor's, for example, put the country on negative watch and may remain poised to cut ratings.

"If S&P sticks with what it said on July 14, when it put the rating on a negative watch, which means a presumption of a downgrade, it will downgrade because the size of the deal is not large enough," El-Erian says.

Hopefully that won't happen.

"I suspect they are under tremendous pressure not to downgrade."

Other market watchers will pay close attention to how ratings agencies react to the news as well.

"This looks like a short-term fix and we don't have a long-term solution put in place, which is really what the rating agencies were looking for," says Michael Woolfolk, senior currency strategist with BNY Mellon in New York, according to Reuters.

Sluggish Growth Remains

Growth remains slower than expected, and Federal Reserve officials may consider fresh stimulus measures to speed up economic activity.

Monetary policy authorities wrapped up a second round of quantitative easing on June 30, where the Central Bank basically prints money and buys assets held by banks in order to pump money into the economy and make it grow.

That second round of quantitative easing, known as QE2, received mixed results in that it did pump up the stock market but did little make the economy grow, lower unemployment while pressuring inflation rates up in the process.

While Federal Reserve officials say interest rates will stay low and outlooks for monetary policy will remain expansive, they don't plan to — but also won't rule out — stepping up loose monetary policy a notch by rolling out a QE3 program.

"The question with QE3 is not just what the benefits are, but what are the costs and risks, and there is a concern out there that while you may get some benefits, there are lots of costs and risks."

The country will remain stuck in what Pimco has coined as the New Normal, an extended period of sluggish growth, elevated unemployment rates and ongoing regulatory concerns.

"We simply cannot generate enough growth to get us over all of these issues and therefore, we have all these structural headwinds that continuously slow us down and until we see structural solutions, we are going to be stuck on this bumpy journal to the New Normal."

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An agreement among Democrats and Republicans to lift the country's $14.3 trillion debt ceiling is positive in that it should end fears of a government default, but the possibility of credit downgrades is still out there, says Mohamed El-Erian, CEO of Pimco, the world's...
Pimco,El-Erian,Downgrade,Threat
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2011-09-01
Monday, 01 Aug 2011 01:09 PM
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