US Must Address Debt Issue to Calm Investors: El-Erian
The markets are sending warning signals that investors are concerned over US debt, Mohamed El-Erian, co-CEO of the bond king Pimco, said on CNBC.
El-Erian's counterpart at Pimco, Bill Gross, sent shivers through the markets Thursday when he said the US is in danger of losing its triple-A bond rating because of all the debt the government has issued. The statement came on the heels of similar concerns about UK debt.
While Moody's tempered concerns over the credit rating, El-Erian used a "neighborhood" analogy to reflect global sentiment that even though a downgrade to national debt may not be imminent, the government needs to start addressing the problem.
"All the markets exist in the neighborhood and it's a triple-A US neighborhood. If people start questioning the neighborhood then wer're going to start putting in a risk premium across the board," El-Erian said in a live interview. "This is all about incremental stuff. The big lesson from the crisis we've been in is that it morphs--it morphs from one balance sheet to the other. The concern out there right now is the next area that it may morph to is the public balance sheet."
Investors are seeking clarity on what the government's exit strategy is to clear the debt as part of a long-term financial strategy, El-Erian said.
The government has stabilized credit markets in the short term, but he said there is concern that there could be long-term ramifications that the government is not addressing. Countries holding sovereign US debt sold off yesterday and the domestic markets followed suit, with both Treasurys and the stock market falling as gold rose.
"The market looks at the short term, steps back and says 'we're on a journey. What does the destination look like?" El-Erian said. "Yesterday was a warning sign that people are worried about the destination."