July 15, 2011

PIMCO’s Gross Warns, Don’t Mess With Debt Ceiling—Raise It

Gross calls out Washington politicians for the game of chicken they’re currently playing with America’s finances

PIMCO Chief Bill Gross. PIMCO Chief Bill Gross.

In rhetorical prose that has become his signature, PIMCO chief Bill Gross took to the Washington Post on Wednesday to explain his position on the deficit and debt debate now consuming the nation’s capital.

“To raise or not to raise the debt ceiling; that is the question,” Gross begins, in a flowery style familiar to readers of his monthly economic outlooks. “Whether ’tis nobler to suffer the slump and arrows of default today or in some distant future. Oh, bards of Washington, give us your answer.”

He wastes little space getting to his point, which is to call Washington politicians out for the game of chicken they’re currently playing with America’s finances.

“This Shakespearean financial dilemma hangs in the balance between now and a somewhat theoretical Aug. 2, but I can tell you what an unbiased investment manager thinks,” according to Gross. “Don’t mess with the debt ceiling. Raise it unencumbered if necessary.”

He backs his claim of an absence of bias in part on the fact that PIMCO owns few Treasury securities. The company’s clients would “theoretically benefit if yields rose on an under-owned asset class that was technically in default. But default would still be a huge negative for the U.S. and global financial markets, introducing fear and unnecessary volatility into the economy and global trade.”

He adds that the result of a default might resemble a similar situation to that of the collapse of Lehman Brothers in 2008, and a default, or even the threat of a default, could put in motion a series of events that would lead to a rise in Treasury yields by 25 basis points.

“If an extra 25 basis points becomes the new benchmark, federal interest expenses might increase by $30 billion to $40 billion annually over the ensuing years as $1.5 trillion of new debt is issued each fiscal year, complicating efforts to narrow budget deficits,” Gross writes.

He then raises an additional concern. As the ratio of federal debt to gross domestic product moves closer to 100% and the nation’s growth rate stubbornly clings to 2% annualized rate, countries that have reserve surpluses (think China) are rethinking their currency preferences. A ratings downgrade or an actual default could mean these countries would look for a different reserve currency, which would jeopardize “trade receivables and overnight letters of credit in the process.”

“The answer to our modern-day Hamlet’s question then, is that there should be no question at all,” Gross concludes. “The debt ceiling must be raised and not be held hostage by budget negotiations. Don’t mess with the debt ceiling, Washington. Bond and currency vigilantes will make you pay.”

Reprints Discuss this story
This is where the comments go.