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Bill Gross on Greece: ‘Grexit’ Might Be Best-Case Scenario

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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 The funds have been basically withdrawn and turned into euros on the part of the private sector.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?

Gross: I think it does. And I think that’s what we’re seeing this morning with the hurricane that I suggested, and the eye of the hurricane. You’re seeing massive support behind the scenes of course on the part of the ECB. You’re seeing massive support by the Chinese in terms of their stock market. You’re seeing basically central governments throwing everything they have at the markets and keeping them calm.

Ultimately, though, Draghi has to wonder whether the purchase of Spanish debt and Italian debt leads to the same type of conclusion down the road as what perhaps is beginning with the Greek example. The ECB is owed, as I’ve mentioned, over EUR 100 billion by the Greek banks, which appear to be insolvent. And to the extent that they continue this program of ELA for other peripherals, then perhaps down the road you have the same situation. So the Eurozone, the euro union, certainly is at risk here in terms of their arrangement with a central bank that at some point has been unwilling to extend additional credit to one of their creditor and member countries, namely Greece.

Schatzker: Bill, I have to jump on your point about Chinese stocks. It was back on June 3 that you tweeted “up next, the Chines Shenzhen index.” You were talking about a potential short, but at that point you said “not just yet.” Did you end up shorting Chinese stocks? Did you get in in time to, if you will, enjoy the dramatic breathtaking declines in volatility we’ve seen since then?

Gross: Well I did come public and say “short the Chinese stock market” through a Barron’s recommendation that came public about four weeks ago. So I’m on record as having reached that point in terms of the Chinese stock market. Where we go from here, since the market is down 20% to 25% from that point, it’s hard to say.

And like I say, the Chinese authorities through increased margin and through increased regulation, lower interest rates, it’s been a massive support program for their stock market, which supposedly the world thinks is relatively insignificant. But I think it is important. And I’m rather proud of that call, although I said “not yet” during the tweet. But two weeks later in a Barron’s article I said now is the time.

Johnson: Bill, can I ask you one final question about Greece? How long can you run an economy like this without a functioning banking system?

Gross: Well I don’t think you can. And that’s why I think they have a week or two to settle this. And the arrangement has to be coordinated with the ECB and with the EU within the eurozone. Basically, to my way of thinking, the zone as led by Merkel and the Germans basically has to come to some agreement in terms of restructuring versus a write-off.

To the extent that there is not a write-off, then the European banks and other institutions are safe from the standpoint of keeping their debt, not only to the Greeks, but to the institutions, ESF and so on, on the books. But to the extent that there is a restructuring that favors them to the extent that there is a write-off that does not, I think [Greece] will want a write-off. And I think the Germans and the EU will want eventually a restructuring. But it has to be done within the next two weeks. July 21st is the key date. If the Greeks do not meet a EUR 3 billion payment at that point, then basically the ELA, the $100 billion worth of funds extended to Greek banks through the ELA, will have to be declared in default because the ECB cannot lend on defaulted collateral.

Schatzker: Bill, very quickly, before we go, is a Grexit, if you will, a—or a so-called Grexit, an exit of Greece from the eurozone—your best case scenario for this country right now?

Gross: Yes, I think it is, 70% to 80% And again it depends upon whether the Germans are willing to concede that perhaps austerity to the extent that they have enforced it in Greece, and to the extent that restructuring or debt write-offs are a necessity in the next few weeks, which will be hard to agree upon with all the EU members. It’s a German-led decision.

They suggested it’s in the Greek hands, but I think it’s in the German hands. And to the extent that the Germans are unwilling to come off of their position and to extend their marginal line, I think a Grexit is a 70% to 80% probability.

Schatzker: Bill, it’s amazing how distance can provide clarity to a situation like this. We thank you so much. That is Bill Gross of Janus Capital, manager of the Janus Global Unconstrained Bond Fund, with us here via remote in Athens.

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