Nouriel at Davos: Global Tail Risks Remain

Author: Nouriel Roubini  ·  January 24th, 2013  ·  261399http%3A%2F%2Fwww.economonitor.com%2Fnouriel%2F2013%2F01%2F24%2Fnouriel-at-davos-global-tail-risks-remain%2FNouriel+at+Davos%3A+Global+Tail+Risks+Remain2013-01-24+18%3A14%3A59Nouriel+Roubinihttp%3A%2F%2Fwww.economonitor.com%2Fnouriel%2F%3Fp%3D261399 › Share This Print

Speaking with CNN’s Poppy Harlow at Davos, RGE Chairman Nouriel Roubini reiterated the biggest outlying risks to the global economy: U.S. fiscal woes, the eurozone sovereign debt crisis, a potential China hard landing, and geopolitical risk in the Middle East. Nouriel argued that the worst scenario need to materialize for a meaningful impact on global growth:

“The combination of all of them going in the wrong direction, and they don’t have to become virulent – if we have a bigger fiscal drag, if the problems in the eurozone become worse, if the landing of China is hard rather than softer, and, short of a war between Israel and Iran, if negotiation and sanction fail, then Israel is going to start to talk about war: the fear premium goes up … and that is a negative for the global economy.”

Regarding instability in the Middle East, brought to the fore this week with Israel’s election and recent events in North Africa, Nouriel emphasizes multiple pressure points for global markets:

“Instability in the Middle East is an issue: and the instability is not just tension between Israel and Iran – that if there were to become violent they could spike global oil prices to double the current level and tip the global economy into recession. If you look at the Middle East,  all from Maghreb, Algeria to Afghanistan and Pakistan, there is geopolitical tension that could have economic consequences.”

He also notes geopolitical tensions in Asia—territorial disputes “between China and Japan, in Korea, in Indonesia, in Vietnam, in India, you name it,” that have already negatively impacted regional trade and FDI.

While he concedes a reduction of tail risk in the eurozone, Nouriel argues that fundamental problems in Europe have not been addressed.

The tail risk of something disorderly in the eurozone – like a Greek exit or Italy and Spain losing market access that were severe risks in the middle of last year – have basically been reduced because they have announced this new program of bond purchases, the OMT, there is this new ESM, there is another half a trillion euros out there for banks and sovereign, because there is talk about a banking and fiscal union, and because now Germany has used the words about the periphery of the eurozone that are more constructive.

But if you look at the fundamental problem in the eurozone: lack of economic growth and continued recession, low potential growth because of demographics and lack of reforms, 2) debt sustainability - official and private – are too high, and 3) lack and loss of competitiveness, and a large external deficit that the private sector does not want to finance – those fundamental problems of the eurozone have not been resolved, they may have been pushed by a few quarters, but fundamental problems of growth, competitiveness and sustainability have not been resolved.

Later, Nouriel provided nuance to his slightly less bearish views on the U.S.

View the interviews below: