Wednesday, January 5, 2011

Roubini : lessons. Like from the US, UK, Ireland, Iceland , Spain, real estate bubbles

Nouriel Roubini :"...There are many lessons. Like in US, UK, Ireland, Iceland , Spain, if you let the real estate bubble to get out of hand and burst, then the collateral damage, in the real economy, to the public finances is severe.
And deterioration in public finances is both driven by the need to bail out banks and also by surging deficits due to collapse of their real economic activity. In case of Ireland, one of the lessons is that, I think it was a mistake to honour unsecured claims on the banks amounting to 10% of GDP. By the sovereign guaranteeing these claims, the public debt has grown by another 10% of the GDP. In this case, sovereign was already distressed.
So, if you keep on socialising private losses and putting them on the back of the sovereign, then at some point the back of the sovereign is going to crack. And the insolvency of the sovereign is going to be damaging back into the real economy and the financial system because the sovereign will not be able to backstop the financial system.So I would have responded by imposing a haircut on the unsecure senior creditors of the bank. ...."

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