Nouriel Roubini, the economist who predicted the global financial crisis, said restructuring of Greek state debt is only a matter of time, while Spain may soon follow Ireland and Portugal in seeking financial assistance.
“The issue of Greece is not whether there will be debt restructuring, but when it will be done, and whether it will be an orderly market-oriented debt exchange or disorderly like in Argentina,” Roubini said today at a conference in Almaty, Kazakhstan’s financial center. “One can make the same argument for Portugal’s government and Irish banks.”
Greece said today it will implement 26 billion euros ($37.6 billion) of new austerity measures and 50 billion euros in state-asset sales through 2015 to meet goals to reduce the budget deficit and public debt.
The government came close to defaulting on its debt last year, requiring a 110 billion-euro bailout from the European Union and International Monetary Fund, after it emerged that the country had underreported the size of a budget deficit that reached 15.4 percent of gross domestic product in 2009.
“Greece’s problems won’t be solved by restructuring its debt but by restructuring the country,” Prime Minister George Papandreou said at a Cabinet meeting today in Athens in comments broadcast live by state-run Net TV.
The government is trying to reduce the deficit to less than the European Union limit of 3 percent of GDP by 2014, compared with a targeted shortfall of 7.4 percent this year.
‘Level of Insolvency’
Greece’s public debt is set to surge to 150 percent of GDP in two years after the planned fiscal adjustment, reaching the “level of insolvency,” Roubini said.
Roubini, 53, a professor at New York University’s Stern School of Business, predicted in July 2006 a “catastrophic” global financial meltdown that central bankers would be unable to prevent.
In October 2008 Roubini said he still saw “significant downside risks to equity markets,” failing to predict the stock market rebound that sent shares soaring around the globe last year. The Standard & Poor’s 500 Index has gained 92 percent from its low in March 2009.
EU Economic and Monetary Affairs Commissioner Olli Rehn said yesterday a debt restructuring in the euro area would cause a “chain reaction” in the banking industry and ruled out such an operation for Greece.
Is Spain Different?
The EU aims to reach an agreement on the aid package for Portugal on May 16, three weeks before the country’s June 5 election, which was prompted by the resignation of Prime Minister Jose Socrates after parliament rejected his deficit- cutting plan. The nation requested emergency aid last week.
Spain, the currency bloc’s fourth-largest economy, is trying to restructure its savings banks after a property-market slump left many with surging bad loans. Twelve lenders need to raise as much as 15.2 billion euros to meet new minimum capital standards set by the government.
“When Greece failed, they said Portugal is different,” Roubini said. “Now they say Spain is different. I am not sure Spain is different.”
Spanish Finance Minister Elena Salgado said April 8 that a financial bailout is “completely out of the question.” The government is trying to complete a series of legislative overhauls and asset sales to save its finances.
“Spain is a country too big to fail but also too big to be saved,” Roubini said. There’s a “risk” of contagion spreading to Spain, and “that would be negative for financial markets and the global economy.”
ECB Rate Increases
Roubini said the European Central Bank may raise its main interest rate by as much as 75 basis points (0.75 percentage point) this year and increase it to 3 percent next year to combat faster price growth.
The ECB, which aims to keep inflation just below 2 percent, increased borrowing costs for the first time in almost three years, raising the benchmark rate to 1.25 percent on April 7 from a record low of 1 percent to keep price pressures from feeding into wage demands as the economy strengthens.
Inflation in the 17-nation euro region accelerated to 2.7 percent in March, more than previously estimated and the fastest in more than two years.
“Higher interest rates are strengthening the euro” and “that’s going to damage the competitiveness of the periphery of the euro zone that’s already in trouble,” Roubini said. “My worry is that the ECB is tightening too much, too fast, too soon.”
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