Governments struggling with huge debt loads and now embarking on fiscal austerity measures, such as Greece, may be unable to grow their way out of trouble, the manager of the world's biggest bond fund wrote on Wednesday.
Bill Gross, the co-chief investment officer of Pimco and manager of the firm's Total Return fund, said in his monthly note to investors that higher market interest rate levels will impede full repayment.
A surge in the London Interbank Offer Rate (Libor) is dimming hopes for a sustained global economic recovery because an increase in banks' borrowing costs can spark higher interest rates for borrowers on everything from mortgages to corporate loans.
"At the now restrictive yields of Libor plus 300-350 basis points being imposed by the EU and the IMF alike, there is no reasonable scenario which would allow Greece to 'grow' its way out" of debt, Gross wrote. Pacific Investment Management Co. oversees more than $1 trillion in assets.
Libor is indicative of the different prices at which a panel of banks in London estimate they could obtain funds in the interbank market.
Equating the debt levels to a popular country music song about miners loading up 16 tons of coal only to end up a day older and deeper in debt, Gross said the situation was similar for some governments struggling to meet their debt payments.
"Investors must respect this rather tortuous journey in the months and years ahead for what it is: A deleveraging process based upon too much debt and too little growth to service it," Gross said.
Tougher sovereign budgets, Gross said, lead to lower growth in the short-run, with government worker layoffs, pay cuts, reduced pension benefits and ultimately, a drag on consumption.
"Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator. In many cases, therefore, it may not be possible for a country to escape a debt crisis by reducing deficits!" Gross wrote.
There are some countries that can use increased debt levels to help spur enough growth to repay debt.
"But those countries are few — the United States among perhaps a handful that have that privilege, and investors, including Pimco, have strong doubts about U.S. fiscal deficits leading to strong future growth rates," he wrote.
The European Commission estimates Greece's debt as a percentage of gross domestic product at 124.9 percent this year, rising to 133.9 in 2011.
Gross cited former International Monetary Fund chief economist Kenneth Rogoff for pointing out that at debt levels of 80 percent to 90 percent of GDP, a country's real growth becomes stunted.
"(T)he sixteen tons become more and more difficult to bear. Greece is well past that standard, which is one of the reasons why lenders are balking at extending a private-market helping hand," Gross wrote.
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