Europe’s debt woes are at risk of spreading to Portugal and Spain, and rising budget deficits in the euro area are a concern, said Nouriel Roubini, the New York University professor who predicted the global financial crisis.
“There’s now financial contagion in Portugal, Spain and to a smaller degree even in countries like Italy, Belgium and others in the euro zone,” Roubini said in a speech to a conference in Taipei today.
Concern that Europe’s debt crisis will worsen has shifted to Portugal and Spain since Nov. 28, when the region’s governments gave Ireland an 85 billion-euro ($111 billion) rescue package. The average yield for 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached a euro-era record as speculation intensified that other nations will require support.
The shock from the Ireland rescue was more limited than from the bailout of Greece, Roubini said today. The European Union decided in May to set up a 750 billion-euro fund to help rescue Greece.
Europe’s currency rose 0.7 percent to $1.3075 at 8:43 a.m. in London, from $1.2983 yesterday, on speculation European Central Bank policy makers will signal willingness to act to prevent the spread of the debt crisis when they meet tomorrow.
The risk of a “double-dip” recession in the U.S. has declined compared with four to five months ago, Roubini said, helped by the U.S. Federal Reserve’s plan to buy $600 billion of assets to spur economic growth.
“The world can’t rely any more on the U.S. to keep spending more than its means, more than its income,” Roubini said. “That party, unfortunately, is over.”
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.
Emerging markets need to develop domestic demand and let their currencies rise to help rebalance the global economy, a process that may take many years, Roubini said today.
“There’s quite a significant difference between what’s going on in most of the advanced economies and what’s going on in most of the emerging market economies,” he said.
Most advanced economies, including the U.S., Japan and much of Europe, are going to have “U-shaped,” or more “anemic” recoveries, the professor said, while most emerging nations will have a “V-shaped” recovery.
Officials from emerging nations have complained that near-zero borrowing costs and monetary easing in advanced nations is propelling capital to their higher-yielding markets, threatening asset bubbles.
Nations have adopted disparate steps to manage the risk, with South Korea embracing a tax on foreigners’ investments in its bonds and Indonesia favoring a lock-up period for overseas purchases of bills
Emerging nations face a challenge in trying to manage long-term capital flows as a “wall of liquidity” flows to their economies, Roubini said. They are restraining their currencies as China’s won’t let the yuan appreciate more, he said.
China can’t be the only “locomotive” of global growth and “you still need robust growth in other advanced economies,” Roubini said. A real-estate bubble has started in China and some Asian property markets also show signs of the same development, he said.