Roubini Sounds Off on Virginity, Euro Debt Crisis

“There is this gap between them saying we don’t want to take all this credit risk of backstopping of $3 trillion of Spanish and Italian debt. We don’t want to take all the credit risk of backstopping all the deposits of the eurozone. But then the other side says, unless you do something about it, in spite of our fiscal effort, the spreads are so high, the disintegration fragmentation of the banking system is becoming worse, and therefore we’re going to end up in a complete cliff. The German—the one guarantees that these guys do enough reform and austerity, the other side says we’re doing it, but spreads are so high that it’s become unsustainable.”

Bremmer on whether Germany is removing itself from the conversation in Europe:

“I would not go that far. I do think they are engaged in a very difficult negotiation. … The fact that the Germans at this point are not yet prepared to accept the kind of economic fixes that are required does not tell as much about their ultimate predisposition. They have their own domestic constituencies they have to play with. They also have very strong political constituencies across the eurozone that are acting in a very intractable way. We’ve seen some forms of German capitulation over the course of the past months. … Who is to say that there will not be dramatically more capitulation when they’re actually forced to do it.”

Roubini on what matters most right now politically:

“All of it matters in the sense that we’re kicking the can down the road. The Europeans do not want to make the decisions and there will be political elections in Germany, Italy and other parts of Europe. We have the U.S. presidential election and until then, we’re not going to do anything about our fiscal problem. In China, there is a stall right now because of the leadership transition that happens once in a decade and important decisions about their growth model has to be done. The problem is that every part of the world is kicking down the road to 2013. At this time we’re reaching a point in which by next year, you could be in a scenario in which we hit a brick wall, and then eurozone breaks up, in the U.S. you have a fiscal cliff, in China the landing could be hard and in the Middle East you could have a war. That is a perfect storm.”

Roubini on the complexity of the central banks’ response:

“Everyone is going to do more monetary easing. … We live in a world in which the problems of the advanced economies are not problems of liquidity. Banks have plenty of liquidity. The problems are fundamental solvency. So just throwing money at it implies that the loss will continue to collapse and banks will hold extra money in the form of excess reserves. The credit mechanism is broken and there is no creation of growth in most advanced economies. So it doesn’t affect real economic activity.”

Roubini on Merkel saying euro bonds are “the wrong way” and whether she was speaking to European leaders or voters in Germany:

“She was talking to both of them. The trouble is if there is not going to be an agreement on some point on having e-bonds I think the situation in Europe is going to become disorderly. Italy and Spain are doing massive fiscal adjustment, but their spreads are still very high. … At some point the Germans will decide, do I take the credit risk of backstopping Spanish and Italian debt in exchange for some loss of national fiscal sovereignty by Italy and Spain, in which case the eurozone has a chance to survive. Otherwise, this will become disorderly in the next few months.”