The debt ceiling agreement reached by Democrats and Republicans will likely prove enough to spur investors around the world to take a big sigh of relief, Pimco’s CEO Mohamed El-Erian said Sunday evening.
“This two step agreement is sufficient to lift the threat of a U.S. default and will therefore fuel a relief rally in markets around the world,” he said in an emailed response to questions about the deal by Dow Jones Newswires.
By “two step agreement,” El-Erian was referring to a process that includes both lifting the government’s debt ceiling as well as setting a framework for additional budget cuts later.
The U.S. still faces the risk of a downgrade of its AAA debt rating, however, he added.
“The impact on the AAA will depend on whether S&P sticks to what it stated back on July 14 when it placed America’s rating on negative watch,” El-Erian noted.
El-Erian, who doubles as co-chief investment officer at the world’s biggest bond fund shop, also observed that a “strict interpretation” of terms for a downgrade would likely lead the ratings agency to lower its view on U.S. credit.
“I suspect, the agency is under enormous pressure not to do so,” El-Erian added.