In my view there is a high likelihood that there is going to be another global financial crisis. My data suggests that most advanced economies are already entering a recession. We’re not any more in an anaemic recovery, we’re not any more at stall speed. We’re at the beginning of a contraction. I think there’s a contraction already in most of the eurozone, there is a contraction in the US, also in the UK. That’s the first point.
The second point is we’re running out of policy bullets – monetary, fiscal – backstopping the financial system.
And third, the eurozone is a source of systemic risk. If there is a disorderly situation in the eurozone it’s going to be worse than Lehman.
At this point it’s not any more Greece or Ireland or Portugal. The contagion has spread to Italy and Spain. In the case of Italy and Spain the critical thing is that even if you believe that Italy and Spain are illiquid but solvent, even adjusting from the reforms, they’ve lost credibility in the markets. It’s going to take them at least a year to regain it.
Therefore you need a lender of last resort to backstop the sovereigns until they regain the credibility to avoid spreads going up and leading to a self-fulfilling run. And there are only a very few options, none of them feasible. One of them is the [eurobonds]. It’s going to take at least two years until they can pass that and it’s going to be approved by a treaty.
The other option is the ECB doing the dirty job. But the ECB constitutionally, legally, is not allowed to be a systemic lender of last resort for sovereigns.
The third option is to triple the EFSF (European Financial Stability Facility). But they’re not even able to pass the current extension of the EFSF. If tomorrow the Germans have to triple the EFSF, that is a political mission impossible.
So my worry is that the EFSF is going to run out of money and then there is not going to be a lender of last resort to backstop Italy and Spain. And that could be a source of a systemic break down of the eurozone, with global financial consequences worse than Lehman. - in Emerging Markets
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Nouriel Roubini is an American economist. He teaches at New York University's Stern School of Business and is the chairman of Roubini Global Economics.
