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European Contagion Reduced???

Jim ONeill: Risk of European Contagion Now Significantly Reduced

Wed, Dec 21, 2011 4:04 PM EST

The European Central Bank kicked off its new borrowing facility with a bang Wednesday, lending $645 billion to 523 banks at 1% for up to 3 years. Both the dollar volume of loans and the number of banks seeking funds exceeded expectations.

“In view of everything that’s happened, the fact so many banks are locking in longer-term financing at such generous terms is essentially a good thing,” says Jim O’Neill, chairman of Goldman Sachs Asset Management and author of The Growth Map.

Financial markets didn’t share that view, at least on Wednesday:

After initially rallying to near $1.32 on the news, the euro faded to below $1.31 while European stocks ended in the red. After stumbling all day, U.S. stocks did rebound at the close with the Dow gaining 4 points to end the session at 12,107.

The ECB providing low-costs funds so banks can buy more sovereign debt is a bit odd, given Europe is in the midst of a sovereign debt crisis. Skeptics said the high level of demand for the loans is a sign of how desperate European banks are for financing.

But O’Neill maintains an optimistic view.

The ECB action is “quite significant,” he says. “It seems we are having a slightly more substantial floor put under this European mess compared with recurring disappointments from European politician.”

While many challenges remain – most notably the fate of Greece – O’Neill believes the eurozone will hold together and says the ECB has now “significantly reduced the risks of financial contagion from Europe to the rest of the world.”

If true, that would be very positive for stocks as 2012 gets underway. Indeed, O’Neill writes that “with a little bit of luck, [Europe] might go back to being as dull as it usually is” next year, which is about the most-bullish thing we’ve seen written or said about the continent in many months.

So hold on to your seat belts.

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