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Pimco's El-Erian: S&P Will Downgrade US if it Holds to Outlook

Thursday, 04 August 2011 08:07 AM

Standard & Poor’s will downgrade the U.S. after it enacted a law to reduce federal debt by $2.4 trillion over a decade if the credit-rating company sticks to what it outlined last month, said Pacific Investment Management Co.’s Mohamed El-Erian.

“It’s not clear that this is enough to preclude a downgrade by S&P,” El-Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “We suspect they’re under tremendous pressure not to downgrade, but if they stick to what they told the world on July 14, they will downgrade the U.S.”

S&P, which has given the U.S. a top AAA ranking since 1941, placed the rating on “CreditWatch” on July 14, saying there’s a 50 percent chance it would be cut within 90 days even if an agreement was reached by Aug. 2. The company said it needs to see “a credible solution to the rising U.S. government debt burden.” It indicated last week that anything less than $4 trillion in cuts would jeopardize the grade.

Moody’s Investors Service and Fitch Ratings affirmed their top credit ratings for the U.S. while warning that downgrades were possible if lawmakers fail to enact debt-reduction measures and the economy weakens.


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President Barack Obama signed the debt-limit compromise bill Tuesday, the day the Treasury Department had said was the deadline for the nation’s borrowing ceiling to be raised to avert a default. The measure will defer decisions on the nation’s finances to a bipartisan panel and may only modestly reduce deficits while slowing economic growth.

$100 Billion a Year

JPMorgan Chase & Co. estimated a downgrade would raise U.S. borrowing costs by $100 billion a year, while Obama said it could hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates. The ratio of general government debt, including state and local governments, to gross domestic product is projected to climb to 100 percent in 2012, the most of any AAA-ranked country, Fitch said in April.

The economy is likely to grow at a rate of 1 percent to 2 percent a year, which may not be fast enough to avoid a recession as consumers and businesses continue to use excess cash to pay down outstanding debt, Newport Beach, California-based El-Erian said.

‘Stall Speed’

“There’s this fear of stall speed,” El-Erian said. “If a plane’s not going fast enough, it ends up by coming down. The risk we’re facing right now is at 1 to 2 percent, that may not be enough for an economy that still needs to de-lever.”

A slowdown may force the Federal Reserve to reconsider adding stimulus, he said.

“Either the Fed is going to get pulled in with some pretty imperfect policy instruments, or the risk of recession goes up,” El-Erian said.

Adoption of the debt plan yesterday ended a months-long debate that reinforced partisan divisions over federal spending. The measure raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years.

Pimco’s $245 billion Total Return Fund has returned 5.86 percent in the past year, beating 71 percent of its peers, according to data compiled by Bloomberg. It gained 1.32 percent over the past month, beating 35 percent of its competitors. The firm managed $1.3 trillion in assets as of March 31.

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Standard Poor s will downgrade the U.S. after it enacted a law to reduce federal debt by $2.4 trillion over a decade if the credit-rating company sticks to what it outlined last month, said Pacific Investment Management Co. s Mohamed El-Erian. It s not clear that this is...
Thursday, 04 August 2011 08:07 AM
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