Pimco CIO: Is Spain a ‘Tumor’ on the Euro Zone

Pimco CIO: Is Spain a ‘Tumor’ on the Euro Zone

Pimco CIO: Is Spain a 'Tumor' on the Euro Zone

Bill Gross, Pimco co-CIO & founder, discusses a “tweet” he sent out earlier this week in which he expressed, in rather graphic terms, his view on the debt crisis in Spain.


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what are his views on spain now? joining us is bill gross of pimco. bill, that was a disgusting — quite. what a turn of phrase. wow. those are your words but if spain is a tumor would italy be a metastasis at this point? that was related to size and perhaps the zit should be a pimple to be more politically correct. when you reach the tumor size it doesn’t necessarily have to be cancerous, but it can impede the normal function of other organs. what we are seeing in spain is a situation where yields and the ten-year are close to 10%. yields in the two-year close to 5% and a country has to grow in terms of nominal space. that’s inflation and real growth. close to what the interest costs are. spain is nowhere close to that. perhaps 4% or 400 basis points different. that produces a debt trap ultimately and potently a cancerous tumor. i want to ask what you expect from the auction in spain on thursday? i missed it. i’m sorry. the spanish auction on thursday. what are your expectations? the spanish auctions are a function of the spanish banks. it is an artificially controlled market. that doesn’t mean private investors like pimco wouldn’t buy spaniuh bonds but for the most part the bills offered today and the twos and tens offered later this week basically are a function of the spanish economy and the spanish connectivity. you can’t trust an auction in europe. it’s a function of what the banks are doing as opposed to what we are doing from the outside. good morning, bill. it’s simon. you spoke about a fed put under the equity market here. they would come in with talk of qe 3 if the markets came out of bed. you were intent on telling us there was a quote from the ecb in europe. i wonder now that the market since you and i spoke is now down 10% in europe. whether you still think are true. they may not come back in to buy spanish debt as so many people expect them to because it would incentivize backsliding on fiscal reform in madrid. are you getting pessimistic in the ability to have central banks to support what’s going on and shareholders? i think so. the ecb expressed unwillingness to continue to buy sovereign debt. they haven’t done it for a month to a month and a half. in spain, for instance, while they had the opportunity on a daily basis there’s been no real ecb purchases. the refinancings which allow the banks to buy debt. but the ecb is basically becoming more germanic and less southern european, so to speak. that’s a tightening maneuver. in the united states the same thing. it was suggested that the qes are a problem and will be dependent upon lower growth. we are seeing some of that. we saw some of it today in terms of industrial production and housing starts. next week’s fed meeting will be important to let us know whether qe is on the table. any risk of contagion? we know argentina is a specia case. what do you think? it is special. they have been in and out of debt. let’s not go too far. nonetheless it’s private capital should it go through. investors need to be aware of what can happen in emerging countries that don’t respect property rights and behave like developed countries have over the past number of decades. i would keep any eye on the developments there. we have to ask about the new office you’re opening in rio. it’s almost shocking that you don’t already have an office in brazil at this point. i’m assuming your firm believes in the long-term future here. we do. not just investing i brazil but investing for brazilians. we are starting with a $10 billion base there. it’s difficult to open a branch in brazil. that’s been a problem for pimco. but we have established an office and are setting up shop. yields are 3% to 4% higher on a to invest for brazilians as they look to gain from global growth. bill, always a pleasure to speak with you. thank you. bill gross at pimco.


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