Pimco’s Mohamed El-Erian Sees Threat to UK, USA Sovereign Debt Ratings
While much of the world’s business press is focussed on the Greek debt crisis, the threat to the euro and the possibility of the IMF entering the fray, the co-chief investment officer of Pimco, the world’s largest manager of bond funds, has offered insights on what he sees as an even greater threat to the global economy. Dr. Mohamed El-Erian reacted to the recent assessment that came from the ratings firm Moody’s, which suggested that the United States and the United Kingdom faced a growing threat to their AAA debt ratings, as their public finances accumulate ever larger deficits.
According to El-Erian , “there has been a very sharp increase in debt to GDP in the United States, over 20 percentage points. That was unthinkable. What Moody’s is saying is that unless we see a credible medium term fiscal adjustment program, there is a risk debt indicators will get to a level that is incompatible with a AAA rating.”
What are the odds that we will see “a credible medium term fiscal adjustment program” from the UK and US political establishment? Not good, in my view, which means a ratings downgrade for US and UK sovereign debt is inevitable, making insolvency an increasingly likely scenario for these two economies.
