It's The Economy Stupid: Pimco On Potential U.S. Default

Oh good, Mohamed El-Erian does a “fluff” piece to make us all feel better…

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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

unpredictable.”

     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.

 

                         Recession Risk

 

     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

assets.

     “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.

27.

 

 

 

John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

225-342-0013

jbroussard@treasury.state.la.us