Goldman Sachs Asset Management's chairman says the European Central Bank's announcement it would provide easier three year liquidity for banks in December has "dramatically reduced the the chances of a systemic banking crisis" in the region.
Jim O'Neill (pictured) says: "While it obviously can't solve deep fundamental issues facing Euro Area economies, it certainly has cut the vicious circle between that and sovereign debt holdings, and in addition, greatly reduced the risk of contagion beyond Europe. "
O'Neill said he was "somewhat baffled" why people still worry about this risk.
He cited a US presentation he saw recently that put the probability of a banking crisis linked to Europe at 25%, and the probability for "normality" for the US at just 10%.
"I cannot see this risk being anything close to this in the next 3 years. In my view, because of the [ECB move], it can't be much at all."
"On top of this, we had another impressive performance from Mario Monti, the new Italian prime minister this week [by] presenting a number of important supply-side structural reforms. In addition to being one of the few leading policymakers who wasn't moaning about credit rating agencies, he suggested that lots of changes and reforms are necessary."
Against this backdrop, O'Neill said "the improved performance of the Italian bond market makes a lot of sense, and I suspect it is set to continue.
"There are plenty of things that can still go wrong, but it is true that, apart from the above, the European markets have started the year in better shape despite the widespread credit downgrades, all the fears about the French election and, of course, the uncertainties surrounding Greek debt talks.
"I am wondering whether it is because there is also some acknowledgement that the German economy is not only holding up better than the worst case scenarios, but it is also adjusting more to stronger domestic demand."
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