Greece needs to reduce the nation's debt through a restructuring and impose deep spending cuts to exit its fiscal crisis, according to Pacific Investment Management Co.'s Bill Gross.
“That speaks to default, or in polite terms, restructuring, some type of formal agreement between creditors that avoids the nasty word of default,” Gross, manager of the world's biggest mutual fund at Newport Beach, California-based Pimco, said during a Bloomberg Radio interview with Tom Keene. “They also need to follow the route of the IMF in terms of strictly imposed fiscal conditions which reduce some of the ridiculous measures that have been ingrained in the Greek economy. So it's a twofold type of approach.”
Greek bonds tumbled and bunds rose as world leaders prepared to discuss ways to fix Europe's debt crisis and halt the contagion that at one stage yesterday wiped $1 trillion from the value of U.S. stocks. The extra yield investors demand for holding 10-year Greek, Spanish or Irish debt instead of benchmark German Securities surged to the highest since before the euro's debut in 1999.
Pimco bought 30-year Treasury bonds during yesterday's selloff as investors sought a refuge in U.S. government debt, Gross said. German bunds should also benefit, he said.
Efforts by European leaders, including the agreement of a 110 billion-euro bailout package for Greece, haven't managed to assuage investor concern that the region's most indebted nations will struggle to pay off their debts. The euro fell to $1.2529 yesterday, the weakest since March 5, 2009.
Governments will likely have to employ some type of “capital injection” into European banks similar to the Troubled Assets Relief Program, or TARP, set up in the U.S. after the collapse of global credit markets in 2008, Gross said. Pimco owns the debt of European banks, he said.
“We look forward to a response from the ECB in terms of the further policy measures that might ultimately support the banks,” Gross said. “The problem with Greece and perhaps with Spain and Portugal is one in which the banks, the euro banks, are heavily involved and so it becomes a question of which to bail out.”
Leaders from the Group of Seven nations will hold a conference call to discuss Greece today, Japanese Finance Minister Naoto Kan said at a press conference in Tokyo, while euro-area leaders will meet in Brussels.
Treasuries rallied and government securities from Greece, Spain, Portugal and Italy fell yesterday after the European Central Bank resisted calls to buy bonds, an option some economists said would help to contain the problem.