The CEO of Pacific Investment Management Co. LLC (PIMCO), Mohammed El-Erian said on CNN’s FAREED ZAKARIA GPS, which will be aired today, that it might be catastrophic if the United States defaulted on its debt.
Pimco is a Newport Beach, CA based investment management company and unit of the Munich-based insurer Allianz SE. Pimco is the world’s largest manager of bond funds holding $1.2 trillion in assets including U.S. bonds.
This statement comes from an actual creditor of the United States at a time when many members of Congress, Presidential candidates, and economist-wanna bees, aka radio talk show hosts, are saying that it is not a big deal if Congress does not raise the debt ceiling.
El-Erian: if the U.S. were to default it would be land of unpredictable. Solve the issue
Mr. El-Erian was asked by GPS host Freed Zakarian …”if there an actual default on the debt limit would be a big event for the markets?” Mr. El-Erian responded “It would be, and simply because of the technical linkages. So if the U.S. were not only to fail to get agreement on the debt ceiling but end up cutting more than just cutting expenditures on transfers and expenditures on federal workers but actually not meet a debt payment, then we would be in the land of the unpredictable.”
A bi-partisan group of lawmakers chaired by Vice-President Biden was meeting to reach a compromise bill on raising the debt ceiling and reducing the national debt. Those talks ended Friday when 2 Republicans, Senator Kyl (R-AZ) and House GOP Leader Cantor (R-VA) walked out because Democrats insisted revenue increases be part of the package.
Mr. Zakarian asked, “So you’re advice to the American political system would be, do not — do not play with this issue?” Mr. El-Erian replied “My advice is please try and get together and solve this issue in the context of a medium-term reform package. 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.”
El-Erian: The end of the Fed’s QE2 program is a major event
In order to stimulate the economy, the Federal Reserve has been buying up U.S. Treasuries to keep the prices stable and interest low. That program is called QE2 which stands for quantative easing. The Fed initiated the policy in 2009, and extended it once thus QE2.It will expire later this year.
When asked by Zakarian if PIMCO was selling US Treasuries because he does not see political will, El-Erian replied, “We find better value in government bonds outside the U.S. right now. So it’s an issue of valuation. You should buy or sell based on price.”
“U.S. bonds have benefitted enormously from the Federal Reserve buying them under the QE2 program, which ends at the end of June. Put another way, the Fed has been buying about 70 percent of how much the Treasury issues,” he added.
Speaking to the urgency of the debt ceiling situation, the PIMCO CEO offered this: “Fareed, as an investor, it’s very important to recognize what you’re alarm clock is. You know, all of us would like to wake up just as the alarm clock is going off, but a lot of us cannot.”
He added, “ A lot of us have type one and type two errors. Type one is where you wake up before your alarm clock and just sit there and you’re early, but at least you don’t miss the alarm clock. The other alternative is you oversleep and you sleep through your alarm clock. Our preference has always been wake up earlier than later.”
President Obama is meeting Monday with Senate Leaders to see if they can come to some agreement since the House GOP walked out of negotiations. Let’s hope they watched Freed Zakarian’s GPS Sunday.
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