Jim O'Neill: Spain can avoid the path of Greece and Portugal

Jim O'Neill, chairman of Goldman Sachs Asset Management (GSAM), has been left unimpressed by Friday's meeting of eurozone leaders, and thinks many important questions remain unanswered and key markets such as Spain are being misunderstood.

O'Neill asked in his latest market commentary:

'Who is going to be responsible for forcing countries that are deemed to be becoming less competitive to adopt corrective policies?  How will Greece, and perhaps Ireland and maybe now Portugal, be able to show domestic demand growth in the foreseeable future surrounded by such large debt refinancing? And how do we stop the crisis from creeping to the next candidate?'

O'Neill thinks the next candidate is looking increasingly likely to be Spain. However, he argues that with the help of some better thought-out communication strategies, the writing need not be on the wall for the country.

'According to the domino theory, the attention will now shift to the next potential debt and deficit candidate, which of course is Spain. Having been in Madrid recently, I am partly persuaded to the view that Spain is in much better fundamental financial health than the three that have been so troubled so far.  The data supports this, but as I told everyone I spoke to, this is not a view shared by many outside Spain. And if it is true, it should be more straightforward than it has been for some Spanish financial institutions to make clear.'

He added: 'If the leaders of Spain’s troubled Caja can show more clarity about their vulnerabilities and their capital needs, it seems to me now that the country will not follow the path of the others. EMU bears would then have to find something else to be grizzly about.'

He is also optimistic on markets, predicting new highs for the year before the end of Spring.

'This past week’s market performance has left the bears somewhat bewildered as the S&P showed its strongest weekly rally since December and Chinese equities continue to creep higher. As we approach the data-intensive start of the next month, it seems to me that there is a good chance of new highs for the year for many markets before the Spring is over. In China’s case, as the evidence of a 'soft landing' increases, perhaps something even stronger.'