Gross: Greece to Default Following Downgrades

Bloomberg

By Wes Goodman - Jan 16, 2012 5:34 AM GMT+0200

… though the two sides haven’t been able to agree…

… efforts to address Europe’s financial problems are falling short…

… The bulk of sovereign-bond holdings should be in the U.S….

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Greece is heading for default.

The downgrade of European ratings by Standard & Poor’s last week shows countries can fail to meet their debt obligations, Gross said in a Twitter posting. Greece will prove to be the latest example, Gross wrote.

Greek officials will meet with lenders on Jan. 18 after discussions stalled last week over the size of investor losses in a proposed debt swap, raising the threat of default. European officials and creditors plan a 50 percent cut in the face value of Greek debt by voluntarily exchanging outstanding bonds for new securities, though the two sides haven’t been able to agree on the coupon and maturity of the new debt.

France and Austria lost their top rankings in a series of downgrades Jan. 13 that left Germany with the euro area’s only stable AAA grade, as S&P warned that efforts to address Europe’s financial problems are falling short. The region’s leaders are struggling to tame a crisis now in its third year and convince investors they can restore budget order.

S&P cut Greece’s grade to CC in July, meaning the nation’s debt is “highly vulnerable” to nonpayment, based on the company’s rating definitions.

Pimco’s $244 billion Total Return Fund, run by Gross, increased its holdings of U.S. government debt to 30 percent of assets in December, the most in 13 months, according to the company’s website.

“The bulk of sovereign-bond holdings should be in the U.S.,” Gross wrote Jan. 4 on the Newport Beach, California, company’s website. Investors should favor Treasuries, he said, “as long as European credit implosion is possible.”

The Total Return Fund gained 4.2 percent in 2011, underperforming 69 percent of its peers, according to data compiled by Bloomberg.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net;

To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net