UK hooked on debt, PIMCO boss warns
Britain is part of a debtor nation “ring of fire” where bondholders are at risk of being “burned to a crisp”, the head of the world’s biggest bond house has warned.
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By Philip Aldrick, Economics Editor
6:22PM BST 02 Oct 2012
Bill Gross, PIMCO’s founder and chief investment officer, compared the UK to a drug addict who is hooked on debt and struggling to kick the habit in his monthly investment outlook. His comments were part of a broader warning that the US would turn into Greece within a decade if the government did not find $1.6 trillion (£990bn) of savings “over the next five to 10 years”.
Mr Gross, whose company manages $1.8 trillion across the world and whose head of European investment is Ed Balls’ younger brother Andrew, is famous for his florid warnings and influence over market sentiment, if not his consistency.
In January 2010, he helped tip the UK political argument in favour of Tory austerity by warning that gilts were “resting on a bed of nitroglycerine”. In what proved a costly decision, PIMCO sold down its holding just as gilt prices began a giddy rise. In September last year he shifted tack, suggesting that the Chancellor should consider “at a minimum fine-tuning and perhaps re-routing the plan”.
“The problem becomes if [austerity] is too quick and leads to an economic contraction, which it appears close to in the UK,” he said at the time. “An economy that doesn’t grow, ultimately can’t resolve its debt crisis.”
In his latest outlook, Mr Gross picked up the theme of government debt and deficits again, with a particular eye on “the possibility of a fiscal train wreck over the next decade” in the US. He said the US, with its high level of national debt and government borrowing, belonged in the “ring of fire” with Greece, Spain, France, Japan and the UK, where “only gold and real assets would thrive” unless spending is cut and taxes rise.
Describing the list as a “sort of a rogues’ gallery of debtors”, he said: “The US and its fellow serial abusers have been inhaling debt’s methamphetamine crystals for some time now, and kicking the habit looks incredibly difficult.”
About the US, he added: “If we continue to close our eyes to deficits … then we will begin to resemble Greece before the turn of the next decade.
“Unless we begin to close this gap, then the inevitable result will be that our debt-to-GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline. Bonds would be burned to a crisp and stocks would certainly be singed.”
The US has been delaying any decision on austerity until after November’s election. It is facing a so-called “fiscal cliff” in January, when a series of temporary stimulus measures first introduced by President George W Bush start to expire. The automatic tightening of 4pc of GDP would knock two percentage points off growth, economists say, and threaten to tip struggling economies across the world back into recession.
However, Mr Gross said that unless the government can find the necessary $1.6 trillion of savings “even ever so gradually over the next few years, then rating services, dollar reserve holding nations and bond vigilantes may together force a resolution that ends in tears. The damage would likely be beyond repair.”
Rating agency Moody’s warned this month that America will struggle to hold on to its prized AAA rating unless Washington takes measures to rein in the debt. Fitch also has it on negative outlook, and Standard & Poor’s has already downgraded the US. Last week, Fitch warned that the UK was edging closer to losing its AAA rating due to weak growth.