The odds have risen sharply this week of a fresh financial
crisis that will plunge the global economy into a major
depression, as policymakers fall far short of the radical
measures needed to address the fast approaching storm,
economist Nouriel Roubini warned yesterday.
Roubini, an economist famed for having correctly predicted
the 2008 global financial crisis, told Emerging
Markets last night in a telephone interview that the
chances of a chaotic breakup of the eurozone had soared, as
world leaders failed to take meaningful action to combat the
risks posed by rapidly escalating financial market tensions and
a worsening global economic outlook.
Policymakers continued to focus on the threat to the
eurozone posed by Greece, when the locus of the crisis had
shifted to Italy and Spain, he said. At this point
its not any more about Greece or Ireland or Portugal. The
contagion has spread to Italy and Spain.
He said Italy and Spain could go bust within three months
without an immediate tripling of the European Financial
Stability Fund (EFSF). Italy and Spain are toast, unless
we have a tripling or four times as much of official resources
to backstop them, Roubini said.
Even an enhanced E440 billion EFSF increasingly seen
as a solution to the eurozones funding pressures
would not be enough to backstop those nations in a climate of
extreme financial market volatility, he added.
My worry is that the EFSF is going to run out of
money, and then there is not going to be a lender of last
resort to backstop Italy and Spain, Roubini said.
He added that at the rate at which there is now
pressure on Italy and Spain, an enhanced EFSF would be
unable to cover their funding needs by year-end or March
of next year.
He said a lender of last resort was needed to backstop Italy
and Spain, but that none of the options a supersized
EFSF, the issuance of a joint eurobond by member states, or the
provision of unlimited liquidity by the European Central Bank
were politically feasible.
There are only a very few options, none of them are
feasible, Roubini said.
At this point the debate is not whether were
going to have a double dip recession or not. The double dip has
started, he said.
The only question is whether we are going to have a
mild recession in advanced economies or whether were
going to have a severe recession and another global financial
The answer depends on whether you can keep Italy and
Roubini lambasted G20 financial leaders meeting in
Washington yesterday for failing to take any action, after a
week that had seen some of the most severe financial market
swings since the 2008 crisis.
He said the time was nigh for coordinated expansionary
policies among advanced economies. He slammed officials for
refusing to countenance fiscal stimulus.
Were going to make exactly the same mistake like
during the Great Depression, when we took away fiscal stimulus
too soon. That is a huge risk right now, he said.
The IMF has it right, Christine Lagarde has it right.
If everybody does fiscal austerity at a time when private
demand is falling again youre going to have another
But on the eurozone, Roubini said the onus rested with
Germany. The leadership has to come out of Germany.
Either Germany takes the risk of backstopping Italy and Spain
but saves the eurozone, or you have the destruction of the
However, Roubini acknowledged that the political dynamic in
Berlin complicated the picture. Its not obvious
that theyre going to be willing to make that political
decision. Thats the critical thing that has to
The spreads on ten-year Italian government bonds over German
bunds rose to a euro-era high of 4.09% on Thursday. Spanish
spreads also hit euro-era records this week.
Read the full interview with Nouriel Roubini