Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Greece is the world’s biggest candidate for default.
“We suggest that Greece is insolvent and that at some point the can cannot be kicked down the road any further,” said Gross in an “InBusiness with Margaret Brennan” interview on Bloomberg Television. “Ultimately debt holders will have to bear some of the burden as well.”
European finance ministers stepped up pressure today on Greece to sell assets and deepen spending cuts to win an increase of its 110 billion-euro ($156 billion) aid package and more time to repay the loans.
In deliberations clouded by the arrest in New York of International Monetary Fund Managing Director Dominique Strauss- Kahn on sexual assault charges, Europe’s rich countries tied extra money to pledges by Greece to reap more revenue at home and considered whether to make bondholders share the pain.
“Greece is the No. 1 candidate for default,” Gross said. “Greece, even with the stringent fiscal measures, can’t get above the line in terms of real growth. It becomes a question of solvency, as opposed to liquidity.”
The Mediterranean nation’s bonds have fallen as the euro region’s economic powerhouses put up hurdles to an expanded aid package, with public discontent simmering in northern Europe over the costs of propping up high-deficit countries on the continent’s periphery.
Greek 10-year bond yields increased 17 basis points, or 0.17 percentage point, to 15.44 percent today. The extra yield investors demand to hold 10-year Greek debt instead of benchmark German bunds rose 13 basis points to 12.49 percentage points. U.S. 10-year note yields fell one basis point to 3.16 percent.
An overdependence on debt has the global economy in a period of fundamental transformation that Gross calls the “new normal.” Gross forecast last year that mounting deficits and tighter financial regulation will damp growth in the U.S. and the euro zone.
America’s deficit should be taken seriously in terms of the credibility of the U.S. and the dollar’s status as the world’s main reserve currency, he added.
U.S. Treasury Secretary Timothy F. Geithner’s action to stave off the federal debt limit until August gives the America some “wiggle room,” Gross said.
Geithner wrote lawmakers today to say he has declared a “debt issuance suspension period,” a technical measure that allows him to free up borrowing room from the Civil Service Retirement and Disability Fund and the Government Securities Investment Fund. The steps, widely expected as Republicans and Democrats argue over when and how to raise the $14.3 trillion debt limit, won’t affect retirees or government operations.
Standard & Poor’s put a “negative” outlook on the U.S. AAA credit rating on April 18, saying there’s a one-in-three chance of a downgrade unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt.
Gross noted that when the Fed completes its $600 billion bond purchase program under the second round of quantitative easing in June, a third round will take the form of language as opposed to debt buying.
“Language will dominate policy going forward, and investors will take comfort from language that suggests an extended extended period of time,” he said.
Gross, 67, in February cut to zero U.S. government-related debt in its Total Return Fund since February amid low yield levels and an expected rise in inflation.
“There should be little doubt that simply holding Treasuries at these yield levels for an extended period of time represents an abdication of responsibility,” Gross wrote in a monthly investment outlook posted May 3 on Pimco’s website.
Pimco’s $240.7 billion Total Return Fund had minus 4 percent of its assets in government and related debt last month, versus negative 3 percent in March. Cash and equivalents, the largest component, rose to 37 percent of holdings from 31 percent. Mortgage bonds declined to 24 percent from 28 percent, the Newport Beach, California-based company said on its website. Gross said that the fund hasn’t shorted U.S. Treasuries and would be attracted to 10-year yields at about 4 percent.
Pimco’s Total Return Fund returned 7.64 percent in the past year, beating 82 percent of its peers, according to data compiled by Bloomberg. The fund gained 1.12 percent in the past month, better than about 28 percent of its competitors. Pimco is a unit of Munich-based insurer Allianz SE.
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