By Mary Childs and Tom Keene
May 7 (Bloomberg) — Greece needs to reduce the nation’s debt through 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 German bunds rose as European policy makers’ limited response to Greece’s escalating fiscal crisis rattled world markets. Global stocks tumbled, with U.S. benchmark indexes erasing gains for the year, while Treasuries rallied and the dollar rose after Europe’s debt crisis spurred a market rout yesterday that undermined confidence in financial trading mechanisms.
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.
European TARP
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 European banks, are heavily involved and so it becomes a question of which to bail out.”
The U.K. Treasury said Group of Seven officials met by conference call today as the Greek crisis roils financial markets and “agreed to continue to monitor the situation closely, ” the Treasury said in a statement published in London.
Yields to Rise
U.S. 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.
Yields on the 10-year U.S. government bonds will continue to rise, Gross said, as economies outside the euro zone, especially China, India and Brazil, continue to feel inflationary pressures. Ten-year note yields dropped 1 basis point today to 3.38 percent.
“It’s hard to know which side will win in the end, but our bets are slightly on the side of higher interest rates in the United States and many developing economies,” Gross said.
Employment in the U.S. increased in April by the most in four years and the jobless rate unexpectedly rose to 9.9 percent as thousands of people entered the labor force, figures from the Labor Department in Washington showed today. The Federal Reserve will want to see a few months of payroll increases similar to today’s jump of 290,000, before Chairman Ben S. Bernanke and his colleagues are convinced the recovery is becoming self- sustaining, Gross said.
“The Fed’s not about to move, in my opinion, until we start to see significant, steady progress in terms of job growth and lower unemployment rates,” Gross said.
The $225 billion Pimco Total Return Fund managed by Gross has returned 14.5 percent in the past year, beating about half of its competitors, according to data compiled by Bloomberg. Pimco had $1 trillion in assets under management as of Dec. 31 and is a unit of Munich-based insurer Allianz SE.
