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 it’s 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 eurozone’s 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 we’re 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 we’re going to have a severe recession and another global financial crisis.
“The answer depends on whether you can keep Italy and Spain together.”
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.
“We’re 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 you’re going to have another global depression.”
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 eurozone.”
However, Roubini acknowledged that the political dynamic in Berlin complicated the picture. “It’s not obvious that they’re going to be willing to make that political decision. That’s the critical thing that has to happen.”
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.