August 1, 2011

PIMCO’s El-Erian on Debt Deal: Short-Term Gain, Long-Term Disdain

The potential agreement ‘does nothing to restore household and corporate confidence’

Before the announcement Sunday night of a deal to end the U.S. debt crisis, Mohammed El-Erian said “that a potential budget deal in Washington will only bring short-term relief, and it won't remove the threat of a U.S. debt downgrade by credit rating agencies.” 

The CEO of PIMCO made his comments on ABC's "This Week With Christiane Amanpour" prior to the announcement of a tentative agreement to raise the debt ceiling by $2.4 trillion and to offset the increase with deficit reduction measures over the next 10 years. The framework of the agreement, though, had already been announced.

mohamed el-erian"I think this compromise will lead to an increase in the debt ceiling, and therefore avoid default," El-Erian (left) told Amanpour." "But this relief will be short."

"We have one rating agency out there that said it would downgrade unless certain things happen, and these things are not happening fast enough," El-Erian said of the framework being negotiated at the time. "If the U.S. loses that triple-A status, it will be much more difficult for the U.S. to restore growth, so it's unambiguously bad.”

Any deal may still not be enough to calm investors worldwide, El-Erian added.

"The rest of the world is watching, and this will do very little to reduce the concern that the rest of the world has about the role of the U.S. in the global economy," he said.

The potential budget agreement "does nothing to restore household and corporate confidence. So unemployment will be higher than it would have been otherwise, growth will be lower than it would be otherwise, and inequality will be worse than it would be otherwise."

El-Erian, on "This Week," questioned the impact of spending cuts that will likely make up the short-term budget savings in any final agreement.

"We have a very weak economy, so withdrawing more spending at this stage will make it even weaker," El-Erian said.

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