Portugal is next, warns Goldman AM head

Portugal should ultimately seek support from the EU and supra-national banks, even if this risks “bringing Spain under the full scrutiny of the bears”, according to the chairman of Goldman Sachs Asset Management.

Portugal should ultimately seek support from the EU and supra-national banks, even if this risks “bringing Spain under the full scrutiny of the bears”, according to the chairman of Goldman Sachs Asset Management.

Lisbon would be the second to follow Greece and Ireland in requesting a rescue package – worth €110bn to Athens, and between €80bn and €90bn to Dublin once final details are hammered out.

Jim O’Neill said yesterday’s deal in Dublin “will not be the end of the euro ‘saga’.

“There are some major underlying problems, including those that go beyond the level of sovereign debt. Italy and France are lurking, but that is somewhat down the road. And of course, there is always Greece, the semi-dormant problem area.”

He said any relief-rally in sovereign spreads linked to yesterday’s deal in Dublin would likely be short-lived.

He said politicians must act now to avoid an “economically and politically debilitating future” for all.

Debt restructuring and something stronger than the present Growth and Stability Pact is needed.

Some more permanent relinquishing of independence by the European Central Bank, while highly controversial, might also eventually be required. “Arguably, since their key intervention in May, their independence has already been compromised, but it might be not the last,” O’Neill said.

Finally, he counseled Europe’s leaders to shift away from continually compromising in preference of conciliation, and to allow cross-border reforms of labour, product and capital markets..

“Without any of (these) changes European sovereign credit spreads will continue to take the strain and volatility that would otherwise be faced by each country’s individual currency, if they existed.

“If you suppress currency volatility, then unless it is supported by reduced economic volatility, it will simply appear elsewhere.”

Given the eurozone’s woes, O’Neill said, fair value for the euro was around $1.20, not the prevailing $1.36.

“The euro at its current price seems quite overvalued against many other so-called developed currencies, especially the pound and the all-important dollar.

“One could easily conceive of the euro trading at a discount to other major currencies due to a required ‘risk premia’.

“Looking at 2011, and given the evidence of an improving US economic outlook…I personally believe we are more likely to see $1.20 than $1.50, although either could be quite some time off.”

However, he dismissed those who might claim the troubled Eurozone nations could “be the source of perisistent global fears”, but he said on the flipside, any good news from the Eurozone was not likely to sustain market rallies.

“That requires continued growth from the bigger European countries, especially Germany, or much more importantly, continued strong growth from China, the other so-called BRIC countries, leading N11 countries, and the most recent pleasant development of the US delivering positive economic surprises.”

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