a curious Yankee in Europe's court

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Thumbs up on EU bailout: Nouriel Roubini

Posted on the May 12th, 2010

I’ve been nosing around online during the past couple of days to see what leading financial experts and economists are saying about the trillion dollar bailout that the European Union leaders announced Sunday. Easily found some boos and hisses: fears that the EU is going down the same path of moral hazard that some say the U.S. has taken, for example. There’s a sample round-up of quotes and links here.

But I’ve been especially on the lookout for Nouriel Roubini’s reaction, given the extraordinary accuracy of his longstanding predictions on the 2008 financial crisis. And his verdict on this weekend’s EU bailout decision is a thumbs up, generally speaking.

In an article yesterday on CNBC.com, Roubini was quoted as saying (“European Rescue Could Work: Nouriel Roubini” May 11, 2010):

Roubini believes the sheer size of the rescue package will therefore halt the threat of contagion.

The amount, in addition to European Central Bank liquidity facilities and quantitative easing, “comfortably covers the worst case scenario and should thus help fight contagion,” he wrote.

And in a comprehensive interview with CNN Money on Monday (video below), Roubini also expressed his approval of the EU action. Here he offers his views on what he considers the risk level of other European countries, especially those of the acronym PIIGs (Italy comes out not-so-bad here, it’s good to hear).

Reader Comments (1) - Comments are closed
  1. Robert Eberenz said, on May 13th, 2010 at 3:33 am

    Who’s the lender of last resort here? In TARP an external entity to the problem, the U.S. government, bought the bad debts of the banks until the market returned and a fair value for the assets was determined. A crash of sovereign EU state debt would not be solved by this plan, because it is the EU states themselves who are pledging to back the “investors” of these additional 440 billion in debt offerings. Sure Germany and France can keep the thing spinning for a while, but they all share a currency so the downward spiraling self fulfilling prophecy will then begin… Investors sell the bonds they hold because unknown risks in certain states remain too uncontrollable and the prices are falling… As bond prices fall, ratings decrease, currencies become devalued due to a necessity to print more euros, and on and on it goes.

    Some will claim that the IMF is the lender of last resort. However, in the current plan, the IMF is commiting 250 billion USD worth of their Special Drawing Rights units (SDRs), which conveniently equates to the ENTIRE current lending capacity of the IMF. So what happens if developing Asian countries with similar issues catch the Aegean virus and need the IMF for what it was designed to do? Well sports fans, that’s when the proverbial sink would have come in handy…

    Check out our analysis of the issue, where we call into question the ability of the IMF to combat a EU wide crisis, using some simple math and common sense @ http://www.diamondslice.com/2010/02/tarp-2-0-will-the-e-u-let-one-of-its-own-die/