Greece Just Tip of Debt Crisis Iceberg: Roubini

The sovereign debt crisis will get worse and bond vigilantes could move on to even bigger economies like the United States and Japan when they are done sweeping through vulnerable European nations, according to economist Nouriel Roubini.

Nouriel Roubini
Nouriel Roubini

With government debt across the world soaring, the man who predicted the credit crunch is predicting a reckoning.

"The recent problems faced by Greece are only the tip of a sovereign-debt iceberg in many advanced economies,” Roubini told readers of his RGE Monitor Web site.

"Bond-market vigilantes already have taken aim at Greece, Spain, Portugal, the United Kingdom, Ireland, and Iceland, pushing government bond yields higher.” “Eventually they may take aim at other countries – even Japan and the United States -- where fiscal policy is on an unsustainable path," he wrote.

Roubini said he fears failure to learn the lessons of the credit crisis will simply mean a bigger, more dangerous crisis is just around the corner.

"There is a lot of talk about better regulation and supervision of the financial system but the financial industry is back to business as usual -- rebuilding leverage, engaging in prop trading and other risky behaviour, compensating bankers and traders with indecent bonuses -- and is lobbying against better regulation and supervision,” he said.

“Governments are talking about reforms but almost no one has implemented them."

You Can See Bubbles Inflating

Roubini also says he believes that those who claim it is impossible to see an asset bubble coming are misguided.

Bubbles are easy to see coming and have had similar characteristics since Tulip mania hit the Netherlands in the 17th century, he said.

"An asset bubble -- often in real estate or in stock markets or in a new industry -- leads to financial euphoria, excessive risk taking, an accumulation of excessive debt and leverage,” Roubini wrote.

Debtor Nations
Debtor Nations

“So the signposts of this phase -- asset boom and bubble, followed by the eventual bust and crash - are highly predictable if one looks at the economic and financial indicators that show the build-up of such excesses."

Roubini warned that we are seeing more and more crises, that their impact on the economy and society is climbing and people continue to miss the signals.

"The trouble is that in the bubble phase nearly everyone, the exception being a few critical analysts, is swept in a delusional bubble mania of irrational euphoria: households, financial institutions, investors, governments, spinmeisters all of whom profit from the bubble, including Ponzi-schemers who concoct their houses of cards and financial con games," he wrote.

Have We Learned Anything?

Huge debts run up in the build up to the credit crisis by households, corporations and the financial sector remain a huge problem and are being added to buy governments across the world, Roubini said.

"While there is much talk about deleveraging as the crisis wanes, the reality is that private-sector debt ratios have stabilized at very high levels,” he wrote.

“By contrast, as a consequence of fiscal stimulus and socialization of part of the private sector’s losses, there is now a massive releveraging of the public sector. Deficits in excess of 10 percent of GDP can be found in many advanced economies, including America’s, and debt-to-GDP ratios are expected to rise sharply -- in some cases doubling in the next few years."

(Nouriel Roubini will join Maria Bartiromo on "Closing Bell" at 4 pm New York time Tuesday.)