Bill Gross says, Bond contract sanctity is hurt by Greece's debt swap

The sanctity of bondholders' contracts has been diminished by Greece's pushing through the biggest sovereign restructuring in history, according to Bill Gross of Pacific Investment Management Co.

The rules have been changed here, Gross, co-Chief Investment Officer at Pimco, said in a radio interview Friday. The sanctity of their contracts is certainly lessened. Bondholders have that to look forward to going into the future.

Greece drove through its debt swap after cajoling private investors to forgive more than 100-B Euros (US$132-M) of debt, opening the way for a 2nd rescue package.

The subordination of private bondholders to government organizations such as the European Central Bank may have added as much as 1 percentage point to bond yields, Mr. Gross said.

The International Swaps & Derivatives Association meets today to consider a potential credit event related to Greece. The association will likely consider Greece's restructuring a default, triggering credit-default swap insurance on the debt, Gross said. Pimco, based in Newport Beach, California, is a member of the committee that decides whether the default insurance will pay out.

I would suggest overwhelmingly that the CDS is going to be triggered, said Mr. Gross, the founder of Pimco and manager of the world' biggest bond fund. It's sort of like a half-nelson or even a full-nelson in wrestling terms being applied to bondholders under Greek law. They are all being forced to go along.

Yields on Greece's new bonds may climb to as high as 20% amid material risks stemming from implementation of terms for the biggest sovereign restructuring in history, Morgan Stanley INYSE:MS) said Thursday in a report.

Traders are offering to buy and sell the potential new bonds at yields on 11-yr securities of 22%, according to a person yesterday familiar with the prices who declined to be identified because he was not authorized to comment. Pimco has said that the firm does not own any Greek debt.

Paul A. Ebeling, Jnr.

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.