Oh good, Mohamed El-Erian does a “fluff” piece to make us all feel better…
El-Erian Says U.S. Default May Be More Unpredictable Than Lehman Bankruptcy
Wire: Bloomberg News (BN) Date: Oct 8 2013 7:48:28
By Liz Capo McCormick
Oct. 8 (Bloomberg) -- A U.S. default on its debt
obligations would prove more unpredictable to financial markets
than the 2008 collapse of Lehman Brothers Holding Inc.,
according to Pimco’s Mohamed El-Erian.
“What frightens us the most is what happens to the
plumbing system of the global-financial system,” El-Erian,
chief executive and co-chief investment officer at Pacific
Investment Management Co., said in an interview on Bloomberg
Television’s “Bloomberg Surveillance” with Tom Keene. “You
will have cascading failure, multiple defaults, and Treasuries
that act as collateral would be very difficult to exchange and
people will simply step back. It will be like Lehman, but more
The $12 trillion of outstanding U.S. government debt dwarfs
the $517 billion Lehman owed when it filed for bankruptcy on
Sept. 15, 2008. The U.S. Federal Reserve is the biggest single
holder of Treasuries, with $2.27 trillion as of Oct. 7. The
demise of Lehman escalated a financial crisis, that had begun
with the collapse of the sub-prime mortgage market, into a near
global credit freeze that required both the Fed and U.S.
government to take extraordinary measures to resolve.
Even as Newport Beach, California-based Pimco sees the
probability of a U.S. government default as “very, very
small”, volatility in the markets will increase as Oct. 17, the
date the government will run out of its borrowing authority
according to the Treasury Department, approaches, El-Erian said.
U.S. lawmakers began taking the first tentative steps
toward a path to raising the government’s debt limit even as the
rhetoric between President Barack Obama and Republican leaders
grew more divisive.
Senate Democrats are planning a test vote before the end of
this week on a measure that would grant Obama authority to raise
the $16.7 trillion debt ceiling, probably for a year unless two-
thirds of both chambers of Congress disapprove.
If politicians fail to find a compromise agreement to
enable them to lift the debt ceiling, a still struggling global
economy risks a slide in growth, said El-Erian, who runs the
world’s largest manager of bond funds with over $1 trillion in
“There is no doubt in my mind that if we do not lift the
debt ceiling and if we default, the world goes into recession,”
El-Erian said in New York. “The irony of the U.S., is this is
not about an ability to pay, this is about a willingness to pay.
And we are playing Russian roulette, not just with our standing
but with the global financial system.”
Rates on Treasury bills that mature near Oct. 17 have risen
this week as investors sought compensation for the risk of a
default should Congress fail to increase the borrowing limit.
Rates on $93 billion of Treasury bills due on Oct. 24
climbed today as high as 0.225 percent, the most since they were
issued in April, from negative 0.01 percent as recently as Sept.
Assistant State Treasurer
Chief Investment Officer
State of Louisiana
Department of the Treasury