Greek Debt is the 'Tip of Iceberg' for Inflation and Government Defaults

Roubini Calls Greek Debt 'Tip of Iceberg' for Inflation, Defaults

April 28, 2010

Bloomberg - Nouriel Roubini, the New York University professor who predicted the U.S. recession more than a year before its start in December 2007, said rising sovereign debt from the U.S. to Japan and Greece will ultimately lead to higher inflation or government defaults.

“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,” Roubini, 52, said today during a discussion on financial markets at the Milken Institute Global Conference in Beverly Hills, California. Increasing tax revenue won’t be enough “to save the day.”

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

“The thing I worry about is the buildup of sovereign debt,” Roubini, who teaches at NYU’s Stern School of Business, told attendees at the Beverly Hilton hotel. If the issue isn’t addressed, nations will either fail to meet obligations or experience higher inflation as officials “monetize” their debts, or print money to tackle the shortfalls.

Michael Milken, founder of the Milken Institute, said the U.S. has the ability to continue selling private and public debt because its markets remain liquid.

“I would say it is individual leadership’s fault if they are not taking advantage of today’s markets,” Milken, the junk-bond billionaire turned philanthropist, said on the panel moderated by Matt Winkler, editor-in-chief of Bloomberg News.

Debt Crisis

The Stoxx Europe 600 Index fell 1.3 percent to 258.24, a six-week low, after Standard & Poor’s downgraded Spain’s debt by one step to AA. The euro traded at $1.3205 at 4:02 p.m. in New York, compared with $1.3175 yesterday, after touching $1.3115, the lowest since April 28, 2009.

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

“The bond vigilantes are walking out in Greece, Spain, Portugal, the U.K. and Iceland,” said Roubini, a former senior economist for the White House Council of Economic Advisers, adviser to the U.S. Treasury Department and IMF consultant.

‘No Willingness’

“Eventually, the fiscal problems of the U.S. will also come to the fore,” he said. “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.

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.

Both Roubini and Milken supported a carbon tax on gasoline, 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.

Roubini predicted a bubble in U.S. housing prices during an interview with Bloomberg News in October 2005, months before the market peaked, and said in August 2006 that he expected a “painful” recession.

Education Better Investment

Today, he 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 better in the long run.

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.