Markets Fear End Game for Euro Zone: Goldman’s O’Neill

Strong demand for Germany’s two-year bonds, which offer nothing in return, shows that opening Pandora’s Box in Europe has sapped investor confidence, Jim O’Neill, chairman at Goldman Sachs Asset Management told CNBC’s “Worldwide Exchange .”

Jim O'Neill
Ben Stansall | AFP | Getty Images
Jim O'Neill

The currency bloc’s powerhouse sold 4.56 billion euros ($5.8 billion) of its new two-year Schatz auctioned earlier Wednesday with a zero percent coupon — the first time this has happened on debt of such long maturity.

The yield on the bond stood at just 0.07 percent after the auction, the lowest-ever yield for the two-year bond.

“The markets are putting together a higher probability for the end-game in the euro zone, otherwise why would you do that?” O’Neill said in reference to the strong buyer demand for the bond, describing it as “uncharted territory.”

The success of the auction is being seen as a sign that investors are so nervous about the precarious politico-economic situation in the euro zone that they are willing to get paid zero interest just to get shelter in the region’s safest bonds.

O’Neill said that euro as created was flawed, and the crisis in the euro zone was a moment for the French and Germans to decide whether they really want a unified bloc.

“The Greek elections were a cathartic moment. Politicians are trying to make Greek people realize what’s at stake here,” O’Neill added. “They need to get to a United States of Europe.
The French and Germans have to be truly European and they are not being truly European.”

He warned that the exit of one country would damage the rest of the bloc.

“Once one exits, it breaks the notion that it’s a true currency union and that is a big moment,” O’Neill said. “They have to respond and ring-fence clearly, and make it clear that no one else will leave.”

He added that despite the magnitude of the situation in Europe, it was “not the only thing that mattered.”

“I think that the U.S and China drive the world and as long as that show carries on the rally will return,” O’Neill said.