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Roubini: No Need to Panic Over Debt Ceiling, Yet

Tuesday, 15 Jan 2013 | 2:47 AM ET
Nouriel Roubini, chairman and co-founder of Roubini Global Economics
Simon Dawson | Bloomberg via Getty Images
Nouriel Roubini, chairman and co-founder of Roubini Global Economics

Gloomy economic diktats and predicting the financial crisis have earned economist Nouriel Roubini the title Dr. Doom, but in his latest interview the economics professor said the United States had little to fear, despite ongoing fiscal negotiations and the looming debt ceiling.

"In absolute terms, the United States has significant fiscal, growth and unemployment problems," he said at a Reuters conference in New York on Monday. "[But] paradoxically, if we don't reach an agreement in March on the fiscal debt ceiling and we get another downgrade, yields are going to fall, they're not going to go up. Everywhere else, if a country gets a downgrade, the yields go up, in the U.S. it is the opposite."

President Barack Obama rejected any negotiations with Republicans over raising the U.S. borrowing limit on Monday, accusing them of trying to hold him to ransom on debt limit negotiations after the New Year "fiscal cliff" deal. Treasury Secretary Timothy Geithner said the debt ceiling – the government's $16.4 trillion borrowing limit -would be reached between mid-February and early March unless Congress acted to raise it.

If an agreement is not reached on raising the debt limit, the U.S. faces the prospect of defaulting on its loans, having its credit rating downgraded and a double dip recession, economists have warned.

(Read More: US Default Should Be 'Unthinkable': Larry Summers)

But Roubini, an economics professor at New York University's Stern School of Business, said that even if this happened, tail risks in the global economy meant that investors would still flock to Treasurys and the dollar.

"We have low growth, we have low inflation below target, we have zero federal funds…in 2015, we're doing QE3 (a third round of quantitative easing), maybe QE4," he said. "Every time there is a global bout of risk aversion people go into the dollar and Treasurys," he said. "At the peak of the crisis, the dollar rallied because we are the safest," he told the Reuters conference.

"Here you have five or six reasons why, in spite of large and unsustainable debt and the [political gridlock] the bond vigilantes are asleep at the wheel- and they're going to stay like that for a while."

He warned about the danger of "bond vigilantes," bond market investors who protest against monetary or fiscal policies that they consider inflationary by selling bonds, a yield-increasing move.

(Read More: Bond Vigilantes Of Yore Cowed by Central Banks)

"Eventually the bond vigilantes are going to figure out that our debts are unsustainable [alongside those] in Europe, in Japan and in emerging markets and…Eventually, if we don't solve our problems, if we [still] have this dysfunctional political system, then the bond vigilantes are going to wake up, but not yet."

Roubini told the audience that the world's second-largest economy, China, could not do anything to stop investment in the U.S.

"China can bitch about the U.S. fiscal deficit as much as it wants, but between the two evils of pulling the plug on the financing on theU.S., having a rise of the renminbi and a collapse of the export-led growth and the latter evil of keeping on financing us, then the latter evil is the lesser evil [for China]," he said.

"If China shuns the U.S .dollar then every other emerging market says 'Hey, I don't want to let my currency appreciate and lose market share to China' and so they intervene and buy dollar and Treasurys," he said.

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