A default by the U.S. government would have “catastrophic consequences” for the U.S economy, warned CalPERS Chief Investment Officer Joseph Dear on Monday.
Mr. Dear, speaking at the CalPERS investment committee meeting in Sacramento, said what is at risk is a loss of trust in the U.S. dollar as the reserve currency of the world.
And even if a deal is reached between congressional leaders this week to avoid default, the deal might be only temporary, leading to the same consequences of the dollar losing its reserve-currency status, Mr. Dear warned.
He said the effects of that loss would “be painful for the U.S, including a significantly weaker dollar, higher costs for imported goods and higher costs to borrow.”
Mr. Dear said the diminishing of the dollar as the world's reserve currency would happen gradually, “it won't happen in the next week or the next month.” But he said the lack of resolution to the budget crisis is creating a scenario for long-term severe consequences for the U.S.
As for the $272.7 billion California Public Employees' Retirement System, Mr. Dear said as a long-term investor, a default won't be all good or all bad; the pension fund would do what is necessary to use its liquidity to seize the right investment opportunities.
Board member J.J. Jelincic asked whether CalPERS would increase purchases of U.S. Treasuries to take advantage of potentially rising interest rates in event of a default.
Mr. Dear said a default would not be an opportunity by CalPERS for “market timing” because the pension fund would find it too difficult to take advantage of that kind of investment opportunity because of its large size.