The world’s largest bond investor says the fight over raising the country’s borrowing limit threatens to throw the debt market into a tailspin.

“It’s the wrong way to do it,” says Bill Gross, manager of the $241 billion Pimco Total Return Fund, the largest mutual fund. “Obviously, I’m all for a move to a balanced budget over time. But this is like imposing the death penalty for shoplifting.”

In arguments over lifting the federal government’s $14.3 trillion debt limit, both sides have used bond investors as a bogyman.

Congressional Republicans say bond investors will set off a Greek-style financial crisis in the United States if the national debt grows. They’ve promised not to raise the limit without deep spending cuts.

The Obama administration says if Congress refuses to raise the debt ceiling in time, bond investors will flee U.S. debt and create a larger meltdown than the last one.

And why do governments care what Gross thinks? Because bond buyers like him are essentially bankers to the world, playing a vital but behind-the-scenes role in the global economy. Any country that spends more than it receives in taxes relies on them to make up the shortfall.

Under the current limit, the government can borrow another $234 billion, a ceiling that could be reached as early as March. Lifting the limit is usually a non-event: Congress has raised it 74 times in the past 70 years.

This time, however, the battle could turn fierce. Republicans took control of the House in November on a pledge to cut the national debt, which ballooned because of a decade of budget deficits and the Great Recession. The Congressional Budget Office said Wednesday that this year’s budget deficit will reach a record $1.5 trillion.

In response to President Barack Obama’s State of the Union address Tuesday, Paul Ryan, the new Republican chairman of the House Budget Committee, warned of “a crushing burden of debt” and drew comparisons to the European financial crisis.

Gross and others say the Republican strategy is reckless. Typically, bond investors are fiscal conservatives who want the United States to cut its debt and tighten its budget deficits. They worry that rising interest payments will swallow a larger share of the country’s income and hurt the economy. But bargaining over the debt-limit vote raises the specter of a government default, and few things scare investors more.

 

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