Wednesday 26 July 2017

Roubini: 'Europe lacks resources to bailout larger nations'

Europe lacks resources to bailout nations such as Portugal and Spain should the region’s debt woes worsen, said Nouriel Roubini, the New York University professor who predicted the global financial crisis.

“The contagion to Portugal has already occurred,” Roubini said in an interview today.

“If contagion were to become even more severe than it has already been, in places like Spain, then you have trouble because the current envelope of official resources isn’t sufficient to bail out Spain after smaller ones.”

Europe is in the throes of a sovereign debt crisis that spread from Greece to Ireland and threatens to engulf the entire euro-area.

Speculation the debt crisis will spread to Portugal and Spain grew after an €85bn aid package led by European Union governments and the IMF was authorised on November 28 for Ireland.

Ireland became the second euro country to seek a rescue after the Greek debt crisis earlier this year destabilised the currency and forced the EU to set up a €750bn rescue fund backed by the IMF.

The euro has fallen 6.6pc in the past month, the most among its 16 major peers against the dollar, amid concern the European debt crisis is deepening.

Standard & Poor’s cut Ireland’s debt rating two steps on November 23. S&P said this week it placed Portugal’s long-term and short-term foreign and local currency sovereign credit ratings on “CreditWatch” with “negative implications,” reflecting its inability to reduce its current-account deficit.

Emerging nations

Borrowing costs for Europe’s most-indebted nations have soared this week. The average yield for 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached a euro-era record.

Still, European stocks rose today, with the Stoxx Europe 600 Index extending its biggest rally in three months, amid optimism the European Central Bank will act to stem the region’s debt crisis. Asian equities and US futures also advanced.

European Central Bank President Jean-Claude Trichet signaled this week investors are underestimating policy makers’ determination to defend financial stability in the currency bloc.

Roubini in 2006 predicted the US economy was “headed toward a serious slowdown” because of the slump in the housing market, high oil prices and the delayed impact of interest-rate increases.

Officials from emerging nations have complained that near- zero borrowing costs and monetary easing in advanced nations is propelling capital to their higher-yielding markets, threatening to spur asset bubbles.

“Easing of monetary policy by the US is aimed at avoiding double-dip recession and weakness of the dollar,” Roubini said. It’s not in the interest of emerging nations such as India “if US goes into double dip recession.”

Nations have adopted disparate steps to manage the risk, with South Korea embracing a tax on foreigners’ investments in its bonds and Indonesia favoring a lock-up period for overseas purchases of bills. India has raised its policy rates six times this year.

Bloomberg

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