Goldman asset management arm urges Berlin to accept eurobonds

The chairman of Goldman Sachs Asset Management has increased pressure on Berlin to accept the principal of Eurobonds, saying chancellor Angela Merkel should do so as part of a “more fiscally coherent” eurozone.

Berlin has so far rejected the idea of instruments issued jointly by eurozone members.

But GSAM’s Jim O’Neill (pictured) said chancellor Angela Merkel should give markets “some indication…that as part of a more fiscally coherent EMU, Germany would accept the principle of eurobonds”.

He also pushed Italy to enact “a quick resurrection of a credible budget”, and Europe’s Central Bank to “move towards an interest rate cut” – less than two months since it hiked the main shared rate by 0.25% to 1.5%, this year’s second rise.

O’Neill voiced concern Greece “appears to be descending into further economic and policy turmoil”, while Italy seems “in some disarray as it has backtracked on some of the more unpopular measures” of a tougher budget.

He said Rome’s volte face was “not surprising given the intensity of debate about ECB actions to support the beleaguered Italian bond market”.

All this turmoil, plus last week’s US non-farm payroll data – the first to register no job growth for decades – is “a nightmare” for Bern. O’Neill said it now has little alternative to intervening again in markets, to weaken its franc.

“The Swiss authorities face a huge challenge. If they are serious about trying to prevent the devastating damage that could result from the franc’s strength, they will have to intervene even more and pursue the idea of a direct policy target – temporarily - for the franc against the euro, [to] make it clear that Switzerland would offer no ‘safe haven’.”

O’Neill said “a better period of markets” could result from such intervention, in conjunction with co-ordinated G20 policies “to support the world economy and markets”.

O’Neill noted Switzerland’s franc has “shared in the roller coaster rides of global markets” during August, and last week “came roaring back” after poor data from the US and eurozone.

“In times of great uncertainty, the franc is immediately attractive to nervous wealth holders in some part of the world. In the period since 2008, and especially in the past 12 months, it has been perceived as a haven from an increasing variety of hazards: the financial chaos of 2008-2009, the rising troubles and revolts in the Middle East, the fears about the standing of the US in the world, and especially, the increasing fears about Europe.

“In a period of extreme movements, you can expect strong economic consequences for Switzerland and occasionally, dramatic efforts by its policymakers to do something to reverse the currency move. If the Swiss authorities can’t reverse a lot more of the franc’s recent strength, Swiss retail outlets will struggle to survive – never mind some of their international companies.”

Further afield, he said there should be “clear, credible, targeted action from President Obama and Congress to create US jobs and stimulate domestic investment [and] if not more QE from the Fed, an ongoing clarity about their bias”.

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