Bill Gross today (Feb 21st) made the following Tweet on the PIMCO Twitter account:
Gross: All Euroland bonds held privately now effectively subordinated to #ECB. Do ratings reflect this change?
Which followed his tweet on Feb 19th:
The European Union (through European Central Bank and other organizations) is loaning Greece around $170 billion dollars. Based on Bill Gross’ tweets, the terms of the loan make the European Central Bank first in line to get payment if Greece has trouble paying their loans. Any country needing assistance from the European Union (and many of them do) will have to agree to this term if they want money from the European Union (money coming from France, Germany and indirectly the US) This makes the current loan agreement between European countries and their private bond holders fairly meaningless. If a crisis happens, their loans will be subordinated.
US Treasuries have been bought as investors have fled European sovereign (country) debt. Given that the debt of most European countries has effectively become more risky, this move looks a little less like a knee jerk panic reaction.
However, the point of the Greek bailout is to take the pressure off other European countries that are having trouble financing and paying their debts. The idea is that if Europe as a whole says WE WILL NOT LET A MEMBER OF THE EURO ZONE DEFAULT, the market will not be worried about loaning Portugal, Ireland, and Spain money. If the European Union can convince the market of this, they will not need to make any more emergency loans and money will come back into European debt.