Nouriel Roubini sees markets falling, sovereign defaults spreading
Source: BI-ME , Author: BI-ME staff
Posted: Sat January 23, 2010 3:54 pm

INTERNATIONAL. Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics (RGE), said a global rally in stocks may end in the second half of the year. He also expects an increase in the debt burden of many advanced economies.

Speaking in a Bloomberg interview Thursday, Roubini said: " If I’m correct, by the second half of the year, there’s going to be a slowdown of growth in US, Europe and Japan. That could be the beginning of a market correction because the macroeconomic news is going to surprise on the downside."

He sees the failure to restrain asset-price bubbles in emerging markets, fueled by loose monetary policies in the US and around the world, possibly causing an "unraveling and a significant correction of asset prices which will be damaging to global and regional economic growth."

"The real economy is gradually recovering but since March, asset prices have gone through the roof," Roubini said. 

Any correction in commodities may be limited because of demand for raw materials from emerging markets, he said.

Earlier this week, writing in his Forbes column, along with analyst Arpitha Bykere, Roubini said: "Going forward, a weak economic recovery and an aging population is likely to increase the debt burden of many advanced economies, including the US, Britain, Japan and several eurozone countries."

In 2008 and 2009, the decisions by these governments to do "whatever it takes" to backstop their financial systems and keep their economies afloat soothed investor concerns, Roubini, who in 2006 foresaw the financial crisis, wrote.

"But if countries remain biased toward continuing with loose fiscal and monetary policies to support growth, rather than focusing on fiscal consolidation, investors will become increasingly concerned about fiscal sustainability and gradually move out of debt markets they have long considered 'safe havens,' he added.

"Most central banks will withdraw liquidity starting in 2010, but government financing needs will remain high thereafter. Monetization and increased debt issuances by governments in the developed world will raise inflation expectations. These governments will have to offer higher real yields or investors will move to more attractive emerging markets."

The US and Japan might be among the last to face investor aversion, the dollar is the global reserve currency, he said adding that  "the US has the deepest and most liquid debt markets, while Japan is a net creditor and largely finances its debt domestically."

Roubini warned that investors will turn increasingly cautious even about these countries if the necessary fiscal reforms are delayed.

"The US is a net debtor with an aging population, weaker economic growth and risks of continued monetization of the fiscal deficit. Japan's aging population and economic stagnation will reduce domestic savings."

In the US, where the Federal Reserve has pledged to keep interest rates near zero for an “extended period,” the risk of a policy mistake is significant especially in an election year, Roubini told Bloomberg.

“The path of exit is very narrow and the risk of a mistake is significant,” he said, referring to fiscal and monetary policies.

Economic expansion will be more “robust” in Asia and emerging markets, and parts of the Chinese and Indian economies are showing signs of overheating, Roubini said.

“In emerging markets economies like China and India, inflation is already returning to positive levels because there’s high economic growth and policy boosts,” he said.

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