Gross: $250 Billion in Credit Losses Will Slam Economy

Wednesday, Jan. 9, 2008 8:51 a.m. EST Bond guru Bill Gross says credit-default swaps, a derivative used to insure against the risk companies won't pay debts, could cause losses of $250 billion this year, helping send the U.S. economy into a recession.

The Pimco chairman also sees economic growth as low as 0.75% for 2008 and a housing price slide of up to another 10%.

Assuming default rates on corporate bonds reach historical averages of about 1.25 percent, $500 billion of credit-default swap contracts will be triggered, causing losses of $250 billion to sellers of the derivatives after accounting for the recovery value of the securities, Gross told investors in his monthly note. Goldman Sachs estimates that mortgage related losses of $200-$400 billion alone might lead to a pullback of $2 trillion of aggregate lending, Gross wrote.

"Add to that my $250 billion loss estimate from CDS, as well as prospective losses in commercial real estate and credit cards in 2008 and you have a recipe for a contraction in credit leading to a recession,” he wrote.

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