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Roubini sees 'significantly rising' risk that European monetary union will rip apart

April 27, 2010 |  8:21 pm

Economist Nouriel Roubini, the famed Dr. Doom of the global financial crisis, doesn’t need much of a push to wax pessimistic. So the news Tuesday that Greece’s credit rating had been cut to junk status was like pitching him a softball right down the middle.

At a panel at the Milken Institute Global Conference in Beverly Hills, Roubini worried that Greece’s financial woes -- and more important, the deepening fiscal problems of its European neighbors Portugal and Spain -- could batter global credit markets, disrupt the economic recovery and potentially tear apart the 11-year-old European monetary union.

“The reality is that what has happened in the last few months is the first test of the viability of the European market” and the euro currency, Roubini said, adding that the possibility of the European monetary union coming apart is “significantly rising.”

Roubini His comments came after Standard & Poor’s downgraded Greece and also lowered Portugal’s credit rating. The moves intensified fears of financial “contagion” in Europe as the continent’s weakest economies struggle with debilitating debt loads and turn outward for help. Greece last week formally asked for a $60-billion bailout from the rest of Europe and the International Monetary Fund.

Investors dumped bonds of Greece, Portugal, Spain and Ireland on Tuesday, driving yields up. European stock markets were hammered, and the selling spread to the U.S. as well. The Dow Jones industrial average slumped 213 points, or 1.9%, to close at 10,991.

Roubini focused much of his concern on Spain, which in some ways is more troubled than Greece, he said. Spain’s unemployment rate, for example, is 20%, twice that of Greece. Both Spain and Portugal, he said, are uncompetitive in the international economy and will require a host of structural reforms.

Jim McCaughan, chief executive of Principal Global Investors in New York, predicted that Greece ultimately would have to restructure its debt, potentially hurting its bondholders, which include many European banks. 

Though not nearly as bearish as Roubini, McCaughan also worried about Spain’s problems, pointing out that the jobless rate among people in their 20s is about 40%. “That’s getting to the point where democracies become unhinged,” he said.

But those comments prompted panelist Bo Lundgren, director general of Sweden’s National Debt Office, to insist that Europe wasn’t collapsing.

"We are surviving," joked Lundgren, who spoke about the early-1990s financial crisis that Sweden suffered through -- and recovered from. "We are still living."

-- Walter Hamilton

Photo: Nouriel Roubini. Credit: Mark Lennihan / Associated Press

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