From the latest letter (.pdf) from Goldman Sachs Asset Management chairman Jim O’Neill come some really nicely-put thoughts on Greece.
In a nutshell, he says that when all his clients ask him about Greece and Europe, his observations are:
1) Greece is facing an ultimatum in the next election.
2) The ECB will do everything to avoid contagion (think: massive liquidity injections).
3) The mood in Germany is changing towards tolerance of inflation and Eurobonds.
Here’s his full, written-out thought.
Everywhere I went the Greek issue dominated the discussion. I met with a large number of investors, many of which are among the biggest in the US, and virtually every question I received was about the Euro Zone. As the week went on, when asked whether Greece would stay in the Euro, I said that we might as well ask someone on the street. Their answer would be as useful as mine.
I did, however, offer three observations.Firstly, it seems to me, as I wrote last weekend, that the Greek electorate is being offered a pretty simple choice: sign up for the pledges that preceded official aid (and probably receive additional support and stimulus), or don’t (and bye bye). Many people I met expressed concern that policymakers are not doing more “now” to calm down the markets. The reality is that Europe’s leaders have to encourage Greek voters to think carefully and clearly.This is perhaps why the G8 statement this weekend wasn’t more powerful. It is reasonably clear to me that if Greece votes in a way that is interpreted as a “yes” to EMU, they will be offered stimulative support from outside.
Secondly, while there is obviously a significant risk of highly destabilizing contagion, I would strongly expect major policy initiatives to provide a firewall (lots of liquidity from the European Central Bank, etc.).
Thirdly, and perhaps most controversially, as I also wrote about last weekend, in the medium to long term, I think the French election outcome and the subsequent German policy response will be more meaningful to the Euro Area than the Greek election. In this regard, let me repeat that German Finance Minister Schauble’s shift in favour of higher wages, and the Bundesbank’s recognition that inflation might rise above 2 pct for a period, are both to be welcomed as positive developments.
To reiterate, the North Rhine-Westphalia election result adds to the growing likelihood of Euro-denominated bonds with a shared credit rating across the Euro Area. I see Niall
Ferguson has an article in the UK Sunday Times predicting such a future, and I agree with him.
All of these are really sharp thoughts.
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