PIMCO CEO Mohamed El-Erian: Budget Deal Will Only Bring Short-Term Relief

Ratings Agencies May Still Consider Downgrade of U.S. Credit Rating

ByABC News
July 31, 2011, 11:54 AM

WASHINGTON, July 31, 2011— -- One of the most prominent global investors says that a potential budget deal in Washington will only bring short-term relief, and it won't remove the threat of a U.S. debt downgrade by credit rating agencies.

"I think this compromise will lead to an increase in the debt ceiling, and therefore avoid default," said Mohamed El-Erian, CEO of PIMCO, a global investment firm and one of the world's largest bond investors said today on ABC's "This Week With Christiane Amanpour." "But this relief will be short."

"We have one rating agency out there that said it would downgrade unless certain things happen, and these things are not happening fast enough," El-Erian said of the budget framework being negotiated.

"If the U.S. loses that AAA status, it will be much more difficult for the U.S. to restore growth, so it's unambiguously bad," El-Erian added.

The potential budget deal may not settle world markets concerned about the U.S. financial outlook, he believes.

"The rest of the world is watching, and this will do very little to reduce the concern that the rest of the world has about the role of the U.S. in the global economy," El-Erian said.

The potential budget agreement "does nothing to restore household and corporate confidence. So unemployment will be higher than it would have been otherwise, growth will be lower than it would be otherwise, and inequality will be worse than it would be otherwise."

El-Erian questioned the impact of discretionary spending cuts that will likely make up the short-term budget savings in any final agreement.

"We have a very weak economy, so withdrawing more spending at this stage will make it even weaker," El-Erian said.

ABC News' Jonathan Karl reported overnight that negotiators had reached a tentative framework for a deal that would include a debt ceiling increase of up to $2.4 trillion and guarantee an equal amount of deficit reduction over the next decade.

But Karl cautioned that the mantra on Capitol Hill remains the same -- "nothing is agreed to until everything is agreed to." And ABC's Jake Tapper reports that White House officials put the odds of reaching an agreement before Tuesday's deadline at 50/50."