Nouriel Roubini, the New York University professor who forecast the US recession more than a year before it began, said sovereign debt from the US to Japan and Greece will lead to higher inflation or government defaults.
Almost US$1 trillion of worldwide equity value was erased on Tuesday 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 UK and Iceland,' Mr Roubini, 52, said on Wednesday during a discussion at the Milken Institute Global Conference in Beverly Hills, California. 'Unfortunately in the US, the bond market vigilantes are not walking out.'
'The thing I worry about is the buildup of sovereign debt,' said Mr Roubini, a former adviser to the US Treasury Department and IMF consultant. If the problem isn't addressed, he said, nations will either fail to meet obligations or experience higher inflation as officials 'monetise' their debts, or print money to tackle the shortfalls.
'While today markets are worried about Greece, Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems,' Mr Roubini, who teaches at NYU's Stern School of Business, said. Increasing tax revenue won't be enough to 'save the day', he said.
Greece 'could eventually be forced to get out' of the 16-nation euro region, he said in a Bloomberg Television interview on Wednesday. That would lead to a decline in the euro and make it 'less of a liquid currency', he said.
'Eventually, the fiscal problems of the US will also come to the fore,' he said during the discussion. 'The risk of something serious happening in the US 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.
Mr Roubini said the US probably will need a combination of increased tax revenue and lower government spending, while Europe needs to curb spending.
Mr Milken compared the excess debt of US consumers, companies and government to the nation's obesity problem. 'If we could just get Americans to reduce their weight to the same as they weighed in 1991, we could save US$1 trillion and the US could create US$1 trillion of value,' the junk-bond billionaire-turned-philanthropist said. -- Bloomberg
Source: Business Times, 30 Apr 2010
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