'Doctor Doom' warns on future of euro
Spain's debts may sink currency, says Roubini
Published 28/01/2010 | 05:00
SPAIN poses a looming and serious threat to the future of the eurozone, the renowned New York University professor Nouriel Roubini said yesterday at the World Economic Forum's annual meeting in Davos, Switzerland.
Prof Roubini, who earned the nickname 'Doctor Doom' after correctly forecasting the scale of the global banking crash, said he had "never been more pessimistic" about the future of European monetary union.
"Down the line -- not this year or two years from now -- we could have a break-up of the monetary union. It's a rising risk," he said.
Prof Roubini spoke at the forum as investors took fright a day after Greece's huge €8bn borrowing in five-year bonds, which pushed the cost of insuring its government's debt from default to a record high.
The cost widened to 3.85pc points above the benchmark rate after the EU Commission said Greece was still not doing enough to correct its huge budget deficit and reports that China was prepared to lend large sums to Greece were denied.
"Technically, the term is that Greece is getting smacked," said Gary Jenkins, head of credit strategy at Evolution Securities in London.
He said: "Clearly what's happening is very negative and could lead to a vicious circle.
"Unless this bond stabilises and general debt stabilises, you have to ask who is going to lend money to them next time and at what price?"
At the forum, Prof Roubini said the single-currency bloc was facing its very first big test.
"The eurozone could drift, essentially with a bifurcation, with a strong centre and a weaker periphery, and eventually some countries might exit the monetary union," he warned.
For all the focus on Greece, however, he also said that Spain may eventually pose an even bigger threat to the eurozone because it is the region's fourth-largest economy and has higher unemployment and weaker banks.
"If Greece goes under, that's a problem for the eurozone. If Spain goes under, it's a disaster," he said.
But Prof Roubini said even the largest economies were now vulnerable, as financial markets were looking harder at the "new phenomenon" of rising sovereign risk on the ability of governments to service their ballooning national debts.
So-called "bond vigilantes" -- investors who punish governments by dumping their debt -- "have been asleep at the wheel" apart from the euro area, said Prof Roubini.
"Eventually, they could wake up" in Japan and the US and sell off their bonds, just as they did with Greece.
"We have massive fiscal problems in most of the advanced economies and we're not really dealing with it."
After ratings agency Standard & Poor's had lowered its sovereign credit-rating outlook on Japan, Prof Roubini said he was worried about the world's second-largest economy as its debt mounts, deflation returns and the population ages.
He warned: "While it can currently finance itself, thanks to domestic savers, at some point investors may flee the yen, pushing up borrowing costs and crippling the economy." (Bloomberg)