Roubini Says Spain Remains ‘Big Elephant’ in Room

Nouriel Roubini, chairman of Roubini Global Economics
Nouriel Roubini, chairman of Roubini Global Economics. Photographer: Andrew Harrer/Bloomberg

Spain is the “big elephant” in the European debt crisis because there may not be enough money to bail out the Iberian nation, said Nouriel Roubini, the New York University professor who predicted the global financial crisis.

Investor concern has shifted to Spain and Portugal since yesterday, when European governments sought to bolster the euro by giving Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals that would have forced bondholders to bear some costs of future bailouts.

“It is quite likely that Portugal” will be next in line for a financial assistance, Roubini said today in Prague at a conference of chief executive officers sponsored by ING Groep NV. “The big elephant in the room is not Portugal but, of course, it’s Spain. There is not enough official money to bail out Spain if trouble occurs.”

HSBC Holdings Plc estimates Spain may need 351 billion euros over three years. The European Union may be able to deploy only 255 billion euros of the 440 billion-euro European Financial Stability Facility, according to Nomura International Plc. That’s because the bailout fund is financed by bonds, and governments agreed to set aside cash and link lending to the creditworthiness of donors to secure a AAA rating.

The cost of insuring the debt of Spain, which has the fourth-largest euro-region economy, and Portugal soared to record-high levels today, according to CMA prices for credit-default swaps. Contracts on Spain climbed 14 basis points to 336 while Portugal rose 23 basis points to 524.

‘Not Stressful Enough’

Spain, which has the euro region’s third-highest budget deficit, said last week it wouldn’t adopt new measures to protect itself from the worsening debt crisis after cutting the central government shortfall by almost 50 percent and controlling regional spending.

Spanish lenders have 181 billion euros of “troubled exposure” to construction and real estate after a decade-long property boom collapsed, according to the Bank of Spain. Five Spanish lenders failed stress tests in July.

“In Spain, in my view, the eventual fiscal costs of cleaning up the financial system are going to be much larger than have been so far estimated by the government,” Roubini said. “As we saw, the stress tests were not stressful enough, if not a total fudge.”

As the number of countries needing bailouts or financing help grows, Roubini said sovereign debt, and in turn “supranational debt,” will increase as well.

‘Debt Restructuring’

“At some point there might be debt restructuring that become inevitable for the sovereigns and also those financial institutions” that are providing funds, Roubini said. The International Monetary Fund may be one such institution, he said.

Roubini in 2006 predicted the U.S. 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. He hasn’t always been right. In October 2008 Roubini said he saw “significant downside risks to equity markets,” failing to anticipate the 76 percent gain in the Standard & Poor’s 500 Index since its March 2009 low.

The U.S. Federal Reserve’s second round of asset purchases, known as quantitative easing, or QE2, may spark asset inflation and is unlikely to add little more than a few tenths of a percentage point to gross domestic product.

The Federal Reserve said Nov. 3 it would buy $600 billion of assets top spur economic growth. During the first round of quantitative easing, it bought $1.725 trillion of government and mortgage bonds between November 2008 and March 2010.

“Even the QE2 is not sufficient to restore growth to the trend level,” he said. “The problems of the economy are not problems of liquidity, but problems of credit insolvency, and therefore monetary policy cannot resolve this.”


Before it's here, it's on the Bloomberg Terminal. LEARN MORE