The sovereign credit rating of the U.S. will be cut as â€œfiscal theaterâ€ plays out in the worldâ€™s biggest economy, according to Pacific Investment Management Co., which runs the worldâ€™s largest bond fund.
â€œThe U.S. will get downgraded, itâ€™s a question of when,â€ Scott Mather, Pimcoâ€™s head of global portfolio management, said today in Wellington. â€œIt depends on what the end of the year looks like, but it could be fairly soon after that.â€
The Congressional Budget Office has warned the U.S. economy will fall into recession if $600 billion of government spending cuts and tax increases take place at the start of 2013. Financial markets are complacent about whether the White House and Congress will reach agreement on deferring the so-called fiscal drag on the economy until later next year, Mather said.
In a â€œbase caseâ€ of President Barack Obama being re- elected and Congress becoming more Republican, there is a high likelihood an agreement â€œdoesnâ€™t happen in a nice way, and we have disruption in the marketplace,â€ he said.
Policy makers probably will agree on cutbacks that would lower economic growth by about 1.5 percentage points next year, Mather said. They may roil markets by discussing scenarios that would lead to a 4.5 percentage-point fiscal drag, he said.
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