The U.S. may fall victim to bond “vigilantes” targeting indebted nations from the U.K. to Japan in a potential second stage of the financial crisis, New York University professor Nouriel Roubini said.
“Bond market vigilantes have already woken up in Greece, in Spain, in Portugal, in Ireland, in Iceland, and soon enough they could wake up in the U.K., in Japan, in the United States, if we keep on running very large fiscal deficits,” Roubini said at an event at the London School of Economics yesterday. “The chances are, they are going to wake up in the United States in the next three years and say, ‘this is unsustainable.”
The euro slid to the lowest level in more than four years against the dollar today as a German ban on some speculative trading fueled concern the European debt crisis will worsen. Roubini suggested the public debt burden incurred after the 2008 bank panic may now cause the financial crisis to metamorphose.
“There is now a massive re-leveraging of the public sector, with budget deficits on the order of 10 percent” of gross domestic product “in a number of countries,” Roubini said. “History would suggest that maybe this crisis is not really over. We just finished the first stage and there's a risk of ending up in the second stage of this financial crisis.”
Germany banned naked short-selling on European government bonds with credit-default swaps today in an effort to calm financial markets, sparking investor anxiety about increasing regulation. German Chancellor Angela Merkel laid out proposals to gain control over “destructive” financial markets as her government seeks to extend the ban across Europe.
The euro weakened to as low as $1.2144 for the first time since April 2006. The currency traded down 1.3 percent at $1.2181 as of 10:06 a.m. in London.
Roubini, who predicted in 2006 that a financial crisis was imminent, said that the record U.S. budget deficit may persist amid a stalemate in Congress between Republicans blocking tax increases and Democrats who oppose cuts in spending.
“In many advanced economies, the political will to do the right thing is constrained,” he said.
The U.S. posted its largest April budget deficit on record as the excess of spending over revenue rose to $82.7 billion. The federal debt is currently projected to reach 90 percent of the economy by 2020.
Roubini, speaking in a lecture hall packed with students who then queued to meet him at a book-signing, reiterated that the euro region faces the threat of a breakup after the Greek budget crisis. The European Union said yesterday it transferred the first installment of emergency loans to Greece, one day before 8.5 billion euros ($10.4 billion) of bonds come due.
“Even today there is a risk of a breakup of the monetary union, the euro zone as well,” Roubini said. “A double dip
recession in the euro zone” is “something that's not unlikely, given what's happening.”
