Italy situation ‘dangerous’

‘Dr. Doom’ says borrowing costs unsustainable

CERNOBBIO, ITALY • The world’s roving “Dr. Doom” has warned Italy’s huge public debt risks lurching out of control as global borrowing costs jump and the country’s insurgent government plays chicken with deficit limits.

“I am very worried about the new Italian government. Things are going to worsen and the debt dynamics may become unsustainable,” said Prof. Nouriel Roubini.

“We’re in a very dangerous situation,” he added at the Ambrosetti Forum on world economics and geopolitics at Lake Como.

Roubini said the European Central Bank will be halting quantitative easing by the end of the year, removing a crucial buyer of Italian bonds.

This comes at a time when U.S. rates are ratcheting up fast and the era of abundant liquidity is coming to an end.

“They have promised the moon and even if they only do a fraction of what they say, risk spreads will rise and eventually there will be a reckoning,” he said, warning that any Italian crisis would pose a systemic threat to the eurozone itself.

Roubini is an economist at New York University and founder of Roubini Global Economics, whose gloomy predictions have earned him the nickname “Dr. Doom.” He gained fame as one of the few people to predict the financial crisis of 2008.

He said U.S. President Donald Trump’s enormous fiscal blitz and his $1-trillion deficits at the top of the economic cycle had bought a short-term boom — at great long-term cost — but it is a sugar-rush effect.

Asset markets will roll over next year and the U.S. economy itself will hit the wall in 2020 with global consequences, he said.

“Fiscal stimulus will turn into fiscal drag, subtracting two per cent of GDP by then,” he said.

Italy’s tensions have come off the boil over recent days as the Lega nationalist party and the Five Star movement tone down threats of a budget fight with the EU.

However, the coalition has sent mixed political messages, and has to meet at least some of its 75 billion euros in promises to electors. The test will come when hard figures are committed to paper next month.

Meanwhile, the U.S. Federal Reserve will be tightening hard to head off incipient inflation, pushing up the Fed funds rate rapidly to 3.5 per cent.

This is a disaster in the making for emerging markets with large dollar debts and already under severe stress.

TheECBandtheBankof Japan are effectively holding down U.S. long-term rates at the moment through globalized QE but this too is coming to an end.

“It is going to push U.S. bond yields and tighten financial conditions,” Roubini said.

If that were not enough, China will be grappling with a deep secular slowdown after years of “can-kicking” with excess credit creation and investment.

“By 2020, the Chinese will have to accept a five-per-cent growth potential,” Roubini said.

He described it as a “perfect storm” for the U.S., China and emerging markets, with a fragile Europe caught in the violent crosswinds.

Such an outcome would be intolerable for Trump.

“So what is he going to do? He will attack the Fed. He will find a foreign policy crisis. He can’t attack China because it is too big, so he will attack Iran and that will lead to a stagflationary shock,” he said.