The “sanctity” of bondholders' contracts has been diminished byGreece's pushing through the biggest sovereign restructuring inhistory, according to Bill Gross of Pacific Investment ManagementCo.

“The rules have been changed here,” Gross, co-chief investmentofficer at Pimco, said in a radio interview on “BloombergSurveillance” with Tom Keene and Ken Prewitt. “The sanctity oftheir contracts is certainly lessened. Bondholders have that tolook forward to going into the future.”

Greece drove through its debt swap after cajoling privateinvestors to forgive more than 100 billion euros ($132 billion) ofdebt, opening the way for a second rescue package. Thesubordination of private bondholders to government organizationssuch as the European Central Bank may have added as much as 1percentage point to bond yields, Gross said.

The International Swaps & Derivatives Association meetstoday to consider a “potential credit event” related to Greece. Theassociation 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 thecommittee that decides whether the default insurance will payout.

“I would suggest overwhelmingly that the CDS is going to betriggered,” said Gross, the founder of Pimco and manager of theworld' biggest bond fund. “It's sort of like a half nelson or evena full nelson in wrestling terms being applied to bondholders underGreek law. They're all being forced to go along.”

Yields on Greece's new bonds may climb to as high as 20 percentamid “material risks” stemming from implementation of terms for thebiggest sovereign restructuring in history, Morgan Stanley saidyesterday in a report.

Traders are offering to buy and sell the potential new bonds atyields on 11-year securities of 22 percent, according to a personyesterday familiar with the prices who declined to be identifiedbecause he wasn't authorized to comment. Pimco has said that thefirm doesn't own any Greek debt.

“I'm not forecasting a second default but the markets certainlyare,” Gross said. “Markets expect another one down the road.”

With Greece now in a fifth year of recession, Prime MinisterLucas Papademos's government had said that it was ready to forceholders of Greek-law bonds into the swap. The use of collectiveaction clauses may trigger $3 billion of insurance payouts underrules governing credit-default swap contracts.

In the U.S., employers boosted payrolls more than forecast inFebruary, capping the best six-month streak of job growth since2006. The jobless rate held at 8.3 percent. The 227,000 increase inpayrolls followed a revised 284,000 gain in January that was biggerthan first estimated, Labor Department figures showed today inWashington.

“It's a good number, not just the headline but also therevision,” Mohamed El-Erian, who shares the title of chiefinvestment officer with Gross, said today in an “In the Loop”interview with Betty Liu on Bloomberg Television. “It's indicativeof a healing process. We're not yet at escape velocity.”

Bloomberg News

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