Economist Nouriel Roubini expects the sovereign debt crisis facing Europe will spread because bailing out Greece won’t work.
He says the euro zone will underperform the rest of the world this year, growing by just 0.9 percent versus 2.8 percent in the United States.
"Current EU/IMF plans to rescue the worst-placed of these countries— Greece — have drawn well-placed skepticism from markets as they fail to deal with core issues of debt sustainability," Roubini wrote in a note posted on his Roubini Global Economics website.
"Public debt sustainability has exploded as a serious issue in advanced economies, most notably in the euro zone's 'PIIGS' — Portugal, Italy, Ireland, Greece and Spain — but also in many larger OECD economies, including the United States," he says.
Roubini asserts that problems within the euro zone stem primarily from a loss of competitiveness, high wage-growth and labor costs which outstripped productivity, undisciplined fiscal policies and the appreciation of the euro between 2002 and 2008.
Roubini expects Asia, excluding Japan, is likely to soar ahead this year with growth of 8.2 percent, while Latin American growth will top 4 percent over the course of the year, he predicts.
Europe's government debt crisis worsened ominously Tuesday when two financially troubled countries — Greece and Portugal — saw their credit ratings downgraded as markets sold off their debt, the Associated Press reported.
Greece was downgraded to junk status by Standard & Poor's, which lowered Portugal's rating as well. The downgrades come as Greece is appealing for 45 billion euros ($59.58 billion) in bailout loans from other euro zone governments and the International Monetary Fund.
The bailout was intended to shore up Greece and keep the debt crisis from getting out of control.
But Germany wants to see stringent conditions before shouldering the lion's share of the bailout loans — and that has send shudders through markets that the money may not reach Greece in time for a May 19 debt repayment date.
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