Roubini Says Rising Sovereign Debt Leads to Defaults

(Bloomberg) -- Nouriel Roubini, the New York University professor who forecast the U.S. recession more than a year before it began, said sovereign debt from the U.S. to Japan and Greece will lead to higher inflation or government defaults.

Almost $1 trillion of worldwide equity value was erased April 27 on concern that debt will spur defaults, derailing the global economy, data compiled by Bloomberg show. German Chancellor Angela Merkel and the International Monetary Fund pledged to step up efforts to overcome the Greek fiscal crisis, after bonds and stocks fell across Europe in the past week.

“The bond vigilantes are walking out on Greece, Spain, Portugal, the U.K. and Iceland,” Roubini, 52, said yesterday during a panel discussion on financial markets at the Milken Institute Global Conference in Beverly Hills, California. “Unfortunately in the U.S., the bond-market vigilantes are not walking out.”

Credit-rating cuts on Greece, Portugal and Spain this week are spurring investors’ concern that the European deficit crisis is spreading and intensifying pressure on policy makers to widen a bailout package. Roubini’s remarks underscore statements by officials such as Dominique Strauss-Kahn, managing director of the IMF, that the global economy still faces risks.

Sovereign Debt

“The thing I worry about is the buildup of sovereign debt,” said Roubini, a former adviser to the U.S. Treasury and IMF consultant, who in August 2006 predicted a “painful” U.S. recession that came to fruition in December 2007. If the problem isn’t addressed, he said, nations will either fail to meet obligations or see faster inflation as officials “monetize” their debts, or print money to tackle the shortfalls.

Roubini, who teaches at NYU’s Stern School of Business, told attendees at the Beverly Hilton hotel that “Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems.”

European bonds have plunged on concern that Greece’s won’t be able to pay its debt, with Harvard University Professor Martin Feldstein and Templeton Asset Management Ltd.’s Mark Mobius saying a default may be needed. The yield on the Greek two-year bond rose as high as 26 percent after being downgraded to below-investment grade by Standard & Poor’s on April 27, before falling to 17.35 percent today. The euro, which dropped to the lowest in a year yesterday, rose 0.1 percent to $1.3235 at 4:05 p.m. in New York.

Plugging the Leak

Greek Prime Minister George Papandreou met today the heads of the largest private and public-sector unions as well as representatives from the biggest employer group as Greek, EU and IMF officials put the final touches on a package that will allow the country to tap emergency loans. Greece’s budget deficit was 13.6 percent of gross domestic product in 2009, more than four times the limit allowed under European Union rules.

“A default will help to plug the leak,” said Mobius, who oversees about $34 billion in emerging-market assets as executive chairman of Templeton Asset Management, in an interview with Bloomberg Television in Singapore today. “A bailout at this stage does not make sense to me.”

Feldstein wrote in an article published on the Project Syndicate website that the euro region and Greek bondholders will eventually have to accept that “the country is insolvent and cannot service its existing debt.”

Greece “could eventually be forced to get out” of the 16- nation euro region, said Roubini in a Bloomberg Television interview yesterday. That would lead to a decline in the euro and make it “less of a liquid currency,” he said. While a smaller euro zone “makes sense,” he said, “it could be very messy.”

Rebound

The Stoxx Europe 600 Index rose 1.4 percent to 261.74 points today, rebounding from a six-week low yesterday after S&P downgraded Spain’s debt by one step to AA.

Roubini, chairman and co-founder of Roubini Global Economics LLC in New York, said the U.S. probably will need a combination of increased tax revenue and lower government spending, while Europe needs to curb spending.

“Eventually, the fiscal problems of the U.S. will also come to the fore,” Roubini said during the panel discussion. “The risk of something serious happening in the U.S. in the next two or three years is going to be significant” because there’s “no willingness in Washington to do anything” unless forced by the bond markets.

Both he and Michael Milken, the founder of the Milken Institute, supported a carbon tax on gasoline, with Roubini saying it would reduce American dependence on oil from overseas, shrink the trade deficit and carbon emissions, and help pay down the U.S. budget deficit.

Slimming Down

Milken compared the excess debt of U.S. consumers, companies and government to the nation’s obesity problem, saying the “best solution” is to become more efficient instead of raising taxes or unnecessarily cutting expenditures.

Roubini, who predicted a bubble in U.S. housing prices months before the market peaked in 2006, said the U.S. invested too heavily in housing during the past 20 to 30 years, and that spending on education and technology would be more beneficial in the long run.

Mixed Record

Roubini’s forecasts haven’t all been accurate. When the Standard & Poor’s 500 Index fell to a 12-year low 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. On Feb. 5, he said the index, then at 1,066, would be little changed for the rest of the year. The S&P 500 has gained 12 percent since then.

Milken, 63, is the former high-yield bond chief from Drexel Burnham Lambert Inc. who was indicted on 98 counts of racketeering and securities fraud in 1989, ultimately serving about two years after a plea bargain and sentence reduction. For the past decade, he has focused on philanthropy and running the research institute, which seeks ways to generate capital for people around the world.