[FRANKFURT] Pacific Investment Management Co expects Greece and its creditors to resolve a standoff over financial aid, but investors should eventually take losses on their debt holdings to resolve a crisis that's enveloped the euro area.
Such an agreement could come in "various forms," including stretching the maturity of the debt to as much as 60 years, Joachim Fels, global economic adviser at Pimco, which in April lost the title of running the world's biggest bond fund, said at a presentation in Frankfurt on Thursday.
Greece needs to agree on conditions for aid distribution before a June 30 deadline, and Prime Minister Alexis Tsipras is meeting again with creditors Thursday in Brussels in a last- ditch effort to clinch a deal that would avoid a possible default. Such an accord, which Pimco calls its "baseline scenario," would need to be followed by a discount - or haircut - on Greek securities to eventually resolve the issue, Pimco said.
"Our base scenario still is that the parties will find a last minute, or last second, agreement," Andrew Bosomworth, head of portfolio management for Germany, said at the event with Fels. "While we had expected a solution already, we still believe that's the goal of both parties."
Bondholders took similar losses in 2012, when Greece swapped securities with new government bonds of a significantly lower nominal value.
Greece is among geopolitical "tail risks" that will cause volatility. Those also include the conflict between Russia and the Ukraine, the UK potentially leaving the European Union, and Islamic State militants in Iraq and Syria, Bosomworth said.
"The Greek debate destabilizes the eurozone," he said. "We no longer just have a discussion about credit risk, we now have a discussion about currency risk. There is no longer the security that we will all stand together in Europe, as the contract says."
The dollar may trade at par with the euro later this year because US economic growth could exceed expectations and the Federal Reserve will increase interest rates, probably in September and again in December, Bosomworth said.
Newport Beach, California-based Pimco is owned by Allianz SE, Europe's biggest insurer.