Tuesday, June 14, 2011

Pimco’s Gross: US in Worse Financial Shape Than Greece

The United States is in worse financial shape than Greece due to the amount of money needed to cover future liabilities, says Bill Gross, head of Pimco, the world's largest bond fund.

Lawmakers are debating raising a $14.3 trillion public debt ceiling to avoid an August default.

Unfunded liabilities owed to programs like Medicare, Medicaid and Social Security, however, surpass $50 trillion.

Add to that other debts such as those run up during the bailouts of the 2008 crisis, and the total comes to "nearly $100 trillion," Gross says.

Even if that estimate is on the high side, the country's debt issue is here to stay for a while.

"To think that we can reduce that within the space of a year or two is not a realistic assumption," Gross tells CNBC.

"That's much more than Greece, that's much more than almost any other developed country. We've got a problem and we have to get after it quickly."

Pimco manages more than $1.2 trillion in assets and runs the largest bond fund in the world.

Many other financial and economic experts have made similar warnings recently.

New York University professor Nouriel Roubini said during the weekend that a “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy.

There’s a one-in-three chance the factors will combine to stunt growth from 2013, Roubini, who predicted the global financial crisis, told Bloomberg.

Other possible outcomes are “anemic but OK” global growth or an “optimistic” scenario in which the expansion improves.

“There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”

Elevated U.S. unemployment, a surge in oil and food prices, rising interest rates in Asia and trade disruption from Japan’s record earthquake threaten to sap the world economy. Stocks worldwide have lost more than $3.3 trillion since the beginning of May, and Roubini said financial markets by the middle of next year could start worrying about a convergence of risks in 2013.

Meanwhile, a recent USA Today study shows the government is facing $62 trillion in unfunded liabilities, mainly to Social Security and Medicare.

According to a poll sponsored by Public Notice, a non-profit policy research firm, Americans are concerned that if Congress raises the debt ceiling, spending cuts will not ensue, a demand from many Republican lawmakers.

"The American people don’t trust Congress. They are skeptical of politicians of all stripes who have promised and failed to get spending under control time again," says Gretchen Hamel, executive director of Public Notice.

"They blame both parties for the mess we are in and want Republicans and Democrats to work to get us out of it."

Elsewhere, Greece on Monday became the country with the lowest credit rating in the world after Standard & Poor's downgraded it by three notches, saying the agency would consider a likely debt restructuring as a default.

A restructuring of Greece's debt — either with a bond swap or by extending maturities on existing bonds — looks increasingly likely to be imposed by European policymakers as a means of sharing the burden of Greece's crisis with the private sector, S&P said in a statement.

S&P cut Greece's long-term sovereign credit ratings to CCC, just four steps away from default, from B. The short-term rating was affirmed at C and all the ratings were removed from credit watch.

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