Forget Portugal, Says Roubini — Worry About Spain [News Report]

by Avinash Saxena

As Greece and Ireland flounder in Europe, many analysts are turning their gaze to Portugal, the PIIG nati

Flags of Europe, Andalusia and Spain in Granad...

on deemed most likely to follow suit. Economist Nouriel Roubini isn’t worried about Europe’s twelfth most populous country, however; he’s more concerned with Portugal’s larger next door neighbor, Spain.

“I think the big question is not Portugal — that is too small — but rather whether the contagion could spread, over time, to Spain, a country that is on one side too big to fail, but from the other side too big to be saved,”

he said late last week on Bloomberg’s The Pulse.

Citing fundamental risks in unemployment, housing, Spain’s financial system and the country’s ability to compete with its EU counterparts, Roubini pinpointed the nation as a situation worth attention as barometer of the spread of European contagion.

Spain will have to make hard choices in order to shield itself from contagion, according to Roubini, including accelerated structural reform and enforcing fiscal austerity.

“There have been reforms that go in the right direction, but much more radical reforms need to be done to stabilize the economic, financial and fiscal conditions of Spain,” said Roubini.

Roubini also touched on the potential for a rate hike by the European Central Bank. He believes the ECB could raise rates by as much as three times over the course of 2011, to 1.75%.

“I understand the logic of the ECB decision,” Roubini admitted before going on to outline the risk of a rate hike. “You have five countries in the periphery where there is almost no growth or contraction, where you have severe banking problems, where you have had a loss of competitiveness, where there is a need to restore economic growth. And I fear that an early hike is going to increase the growth fragility, the worsening of competitiveness…the financial fragility both of the banking system and of the government.”

The Governing Council of the ECB meets tomorrow to determine monetary policy, with many expecting a rate increase of at least .25% to be announced. The increase would be the first rate hike in three years.

 

 

 

 

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