Speaking with Bloomberg TV on Monday, Bill Gross, manager of the Janus Global Unconstrained Bond Fund, called the situation in Greece “diplomatic” and “problematic,” suggesting there could be significant problems if the country doesn’t pay its debt by the end of July.
“I would suggest that if [European Central Bank President Mario] Draghi doesn’t at some point provide additional funds, and if Greece does not pay the $3 billion, or euro dollar, debt on July 20 or 21, then there [are] going to be significant problems within the system,” he told Bloomberg’s Erik Schatzker.
He blamed the relative calm in the markets following Greece’s decisive “No” vote against austerity measures on the Fourth of July holiday in the United States, calling the current situation “the eye of the hurricane.”
A transcript is below, and you can find a video of the interview here.
Erik Schatzker: … If you happened to be, right now, today the president of the European Central Bank, how willing would you be to throw more liquidity at the Greek banking system?
Bill Gross: Well, throwing more liquidity at the Greek banking system is certainly problematic. Every billion of euros that they throw to Greek banks through the [emergency liquidity assistance program] basically ultimately has to be written off. I mean they have produced a $100 billion ELA program that at this point they owe to themselves. The funds have been basically withdrawn and turned into euros on the part of the private sector. And the ECB is stuck with the tab.
So that Draghi suggested he doesn’t want to be political here, but yet at the same time he is the central banker for the eurozone, and Greece is still within the eurozone. So it’s a—it’s a diplomatic, it’s a problematic, it’s a legalistic potential situation that is not easy to forecast. But I would suggest that if Draghi doesn’t at some point provide additional funds, and if Greece does not pay the $3 billion, or euro dollar, debt on July 20 or 21, then there is going to be significant problems within the system.
Schatzker: Bill, do you think a haircut on depositors or possibly even a full-scale bail-in is and possibly even inevitable at this point?
Gross: Well that was the Cyprus situation. Greece is a bigger country. And the problem there becomes, Erik, that if it happens in Cyprus and if it happens in Greece, then why can’t it happen in Spain and Italy and Portugal and in other peripheral countries? And so the flight for liquidity begins in peripheral countries if in fact there is another bail-in. So I don’t think that that’s the proper solution. But it’s certainly a possibility as evidenced by the Cyprus situation.
Guy Johnson: We were told that it would be doom and gloom, that the markets would fall out of bed if we got a No vote. We got a decisive No vote in the referendum, yet the market reaction, stunningly calm. Are you surprised by that?
Gross: Yes, I am surprised. Sunday was fireworks day here, and or Saturday was, fireworks day here in the United States. It appears that we’re in the eye of the hurricane. I do not believe that this situation really is calm. Ultimately, it comes down over the next few weeks as to whether the Greek debt and the Greek standoff, whether or not it—the Greeks want a significant restructure of their EUR 300 billion plus debt. The troika does not. And so the troika believes a write-off is primarily government and supernationally owned debt.
They believe that will set a precedent for other peripherals. And the Greeks claim that the write-offs in many countries are inevitable. Actually I think, and I’m on the side of the Greeks here, the Germans are being disingenuous with their portion of the debt because they have had massive restructuring of their own debt after World War I, then after World War II when an accord in the early 1950s reduced their debt from 100% to 20% of GDP. So the German example, which they claim should not be applied to the Greeks, has been their historical experience over the past 100 years.
Schatzker: Germany has shown no willingness to undertake a Marshall Plan-like solution for the situation that the Greeks confront. If that continues to be the case again, the focus will shift to Draghi. There is much expectation that the Greek crisis is going to test Draghi’s resolve to backstop the rest of peripheral Europe. Does that create some trading opportunities?