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Roubini Says Greek Default May Spark Lehman-Magnitude Shock

A Greek default could trigger a global economic shock on the scale of that suffered after Lehman Brother Holdings Inc.’s 2008 failure, said Nouriel Roubini, chairman and co-founder of Roubini Global Economics LLC.

A disorderly default by a member of the euro area or an exit from Europe’s single currency bloc could cause a shock “that would reverberate through the global economy,” Roubini said at a seminar in Helsinki today organized by Evli Bank Oyj.

Europe’s failure to rein in its debt crisis means the probability of a recession spreading through the region is now greater than 50 percent, Roubini said. Policy makers are running out of time to ring-fence Greece’s fiscal hemorrhaging and the risk of a “self-fulfilling run” by debt investors on Italy and Spain is growing, he said.

“The problems in the eurozone are chronic” and “won’t go away,” Roubini said. He repeated his view that the European Financial Stability Facility needs to be more than four times its current 440 billion euros ($606 billion) in size to be effective.

Italy and Spain, though still solvent now, are illiquid and will be deemed insolvent by markets because their austerity regimes will trigger recessions, depriving the two economies of the growth they need to service their debts, Roubini said.

Asked to elaborate at a question and answer session following the speech, Roubini said Italy and Spain need a “bazooka” to “have a fighting chance to avoid insolvency.”

Structural Reform

“Unlike Greece, which is insolvent, Italy and Spain are more likely than not to be illiquid but solvent given fiscal adjustment and even structural reforms,” Roubini said. “But once you have lost the market confidence, and the market doesn’t know how much fiscal effort you’re going to do, how much reform you’re going to do, who’s going to be your government, they put pressure on your spreads.”

Though the euro area is unlikely to break up in the next six months, there is at least a 40 percent probability of Greece exiting the bloc, Roubini said. One or two countries may exit the euro area within the next two years, he said.

Roubini, who predicted the U.S. housing bubble while failing to foresee a rebound in global stocks in 2009, also warned there is a high probability of a recession spreading through the world’s advanced economies as the fallout of Europe’s debt crisis chokes recovery prospects in the U.S.

Lehman Brothers

The Sept. 15, 2008, collapse of Lehman sent the Standard & Poor’s 500 Index plunging 43 percent through a trough in March in the following year. Financial institutions lost or wrote off close to $1 trillion. The credit event set the global economy lurching into a crisis from which it has yet to emerge.

Roubini predicted the bubble in U.S. housing prices before the market peaked in 2006. Still, when the Standard & Poor’s 500 Index fell to a 12-year low of 677 on March 9, 2009, he said it probably would drop to 600 or lower by the end of that year. Instead, the U.S. equity benchmark gained 65 percent for the rest of 2009.

Germany said today European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.

Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of an emerging plan to avoid a Greek default, bolster banks and curb contagion. They set the Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered.

The European Central Bank must cut interest rates “radically” to help avert a recession in the region, Roubini said. Europe is “running out of time” to fix its woes, he said.

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