Nouriel Roubini is not ruling out a break-up of the eurozone in the coming two years, after claiming the spread of the region’s debt crisis is approaching an unsustainable point.
The Roubini Global Economics co-founder – dubbed “Dr Doom” for predicting the causes of the credit crisis – also suggested the eurozone debt crisis has already spread across the Atlantic.
Roubini argues that there are three options open to policymakers looking to solve the crisis, saying they can avoid putting in place an official source of financing for troubled nations, establish the European Central Bank (ECB) as a lender of last resort or create a ‘big bazooka’ from pots of money drawn from the international community.
Earlier today, German chancellor Angela Merkel reasserted her opposition to the ECB becoming a lender of last resort as a quick resolution to the debt crisis.
“If politicians think the ECB can resolve the problem of the euro’s weaknesses, then I think they are convincing themselves of something that won’t happen,” she told an economic conference.
Roubini (pictured) says that the creation of a ‘big bazooka’ from the resources of the International Monetary Fund, the ECB and other institutions is the most likely course of action. There is a 50% chance of this being unveiled in “the next few months”, he claims.
“In our view, even that limited plan may fail and once it fails it is not obvious that the international community at that point is going to ‘double down’ after having committed up to €600-€800 billion,” the commentator says.
“At that point, orderly debt restructuring in Italy and Spain may become the right thing to do and eventually if the eurozone is not sustainable the idea of first Greece and Portugal but then of Italy or Spain exiting the eurozone cannot be ruled out.”
He adds this could occur by the end of 2013 or in the opening months of 2014.
Furthermore, Roubini warns that contagion from the debt crisis may have reached the US, as well as sovereigns and banks at the core of the eurozone. The economist points out that US swap spreads are moving to towards the high levels seen 18 months ago.
There is also worry about contagion in the US banking sector, he notes. While the net exposure of US banks to European financial institutions and sovereigns is limited, the gross exposures “are much larger” and causing concern for the Federal Reserve, he claims.
Roubini’s comments come after rating agency Fitch issued a warning about US banks’ exposure to the eurozone.
“Though US banks have manageable direct exposures to the stressed European markets (Greece, Ireland, Italy, Portugal and Spain), further contagion poses a serious risk,” Fitch says.
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