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Wednesday, May 26, 2010

Bill Gross Questions Sovereign Debt

News summary by MFWire's editors

Add famed Pimco-fund-manager Bill Gross to the list of those seeing storm gathering in the fixed income markets and the potential for another credit freeze reminiscent of 2008. Still, even with the warnings Gross told readers of his monthly column on the Pimco Web site that they can expect four to six percent returns on a diversified portfolio of stocks and bonds.

Gross worries that the "credit and equity market vigilantes are wondering if in many cases sovereigns haven’t already gone too far and that the only way out might be via default or the more politely used phrase of 'restructuring.'"

He points to what he terms "restrictive yields of LIBOR+ 300-350 basis points being imposed by the EU and the IMF alike" as a reason why some sovereign debtors will not be able to grow out of their deficits.

The open question is whether the United States will be one of those "precious few" troubled sovereigns.

"But those countries are few – the U.S. among perhaps a handful that have that privilege, and investors, including PIMCO, have strong doubts about U.S. fiscal deficits leading to strong future growth rates," Gross writes.

His belief in the ability of politicians to guide a nation out of a debt crisis also seems sparse:

The burden of debt can take decades to accumulate, but only a few short months to change course into crisis. Many investors, economists and politicians alike have little understanding of why attitudes and lending standards can reverse so quickly – how a seemingly innocuous 'two will get you three' build-up of debt will suddenly produce a crisis like it did aboard my ship in 1968. They operate with the mindset that markets, jobs and economies will 'come back.' 'I'll just wait 'till it comes back' is the common saw amongst underwater investors, just as 'something will turn up' is a sad refrain of many unemployed or underemployed workers. Sometimes it doesn’t come back. Sometimes nothing turns up. Sometimes “three gets you two” in the real, as well as the financial, economy.

The "two will get your three" refrain refers to a story from his days as a shipboard Shylock forty years ago. 

Edited by: Sean Hanna, Editor in Chief

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