Tags: roubini | greece | exit | eurozone

Economist Roubini: Greece Will Exit Eurozone Next Year

Tuesday, 24 July 2012 10:50 AM

Greece will exit the eurozone at some point next year, predicts New York University economist Nouriel Roubini.

The European Central Bank will take half-hearted measures to keep the eurozone intact, but eventually, member nations will end up bailing out the larger Spain and Italy while showing Greece the door, Roubini wrote on his Twitter page, where he often posts economic commentary.

“Endgame of EZ is starting: Greece will exit by 2013 while Italy & Spain will need a Troika program after half-baked attempts by ECB to help,” Roubini wrote.

The Troika consists of the European Commission, the European Central Bank and the International Monetary Fund, which have arranged rescue funding for Greece in the past.

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The European Central Bank has been somewhat reticent to seriously intervene in the European economy by making large-scale bond purchases from banks, a monetary policy tool known as quantitative easing that aims to pump liquidity into the economy to spur recovery.

While the U.S. Federal Reserve has jolted the economy twice via quantitative easing, European policymakers have said such a move today would pump up inflation rates and insist the continent needs lasting fiscal reform to bring about lasting recovery.

Roubini, who called the 2008 housing bust and subsequent contraction long before it happened, has said the global economy will implode next year, and not just Europe.

Earlier this year, Roubini predicted a confluence of four events to merge into an economic hurricane and derail the global economy next year.

Those four elements — stalling U.S. growth rates, Europe’s debt crisis, cooling emerging markets, China namely, and military conflict in the Middle East — are happening now.

“2013 perfect storm scenario I wrote on months ago is unfolding: EZ crisis, US stall speed, China hard landing, EM stall, Mideast time bomb,” Roubini recently wrote on his Twitter page.

Europe appears to be crumbling fast.

The yield on the Spanish 10-year note has spiked to around 7.5 percent in recent days, well above the 7 percent threshold deemed as unsustainable by investors and suggesting the country needs a bailout.

The yield on notes and bonds move inversely to their price.

Eurozone policymakers recently approved the euro equivalent of $122 billion in bailout money for Spain to use to bolster its financial institutions and regional governments, though markets remain convinced the country itself will need a financial lifeline, as evidenced by sky-high yields.

The country’s Treasury Minister Cristobal Montoro said recently that gross domestics product would shrink 0.5 percent in 2013, far worse than a previous forecast for growth of 0.2 percent, The Associated Press reported.

The debt crisis, meanwhile, appears to be infecting healthier countries nowadays.

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Moody’s Investors Service recently slapped negative outlooks on Germany, the Netherlands and Luxembourg on sentiment the three top-rated countries will eventually shoulder more Italian and Spanish debt whether they like it or not, Reuters reported.

“We are in a transitional period, and this transitional period could last for many years, and during this transitional period we do see additional pressure on the strongest nations’ balance sheets, which has increased pressure on their credit standing,” Sarah Carlson, Moody’s senior credit officer, told Reuters.

A Greek exit, Moody’s added, would rattle the entire European financial system and “set off a chain of financial sector shocks ... that policymakers could only contain at a very high cost.”

Other experts have issued similar warnings, including former International Monetary Fund officials.

Greece owes $3.75 billion in bond payments to the European Central Bank next month, and failure to secure help from its European neighbors to come up with the cash could send the country into default, The New York Times reported.

“Europe has become incapacitated,” said Alessandro Leipold, a former deputy director at the International Monetary Fund, The Times added.

Other IMF officials remain worried.

“Everyone is looking for an easy way out, but there isn’t one,” said Stephen Jen, a former IMF economist who runs a London-based hedge fund, told The Times.

That is especially true for Greece, which has tapped several bailouts in the past.

The country is working to bring down its debt burden from 165 percent of gross domestic product today by around 120 percent in 2020, not an easy task with an economy expected to contract by 7 percent this year.

Athens plans to cut roughly $13 billion in spending without firing any of its 150,000 public sector workers, which economists say is not going to happen.

Expect layoffs to ensue and tensions to flare.

“I don’t see how you do that without firing people,” said Miranda Xafa, a former investment banker and independent consultant based in Athens, The Times added.

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Tuesday, 24 July 2012 10:50 AM
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