Greece's problems 'tip of the iceberg' warns Dr Doom

Nouriel Roubini, the New York University professor who predicted the US recession more than a year before its start in December 2007, says rising sovereign debt from the US to Japan and Greece will ultimately lead to higher inflation or government defaults.

"While today markets are worried about Greece, Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems," Roubini said yesterday during a discussion on financial markets at the Milken Institute Global Conference in Beverly Hills, California.

Increasing tax revenue won't be enough to save the day.

Roubini's remarks underscore statements by officials such as Dominique Strauss-Kahn, managing director of the International Monetary Fund, that the global economy still faces risks.

Credit-rating cuts on Greece, Portugal and Spain in the past few days are spurring investors' concern that the European deficit crisis is spreading and intensifying pressure on policy makers to widen a bailout package.

"The thing I worry about is the buildup of sovereign debt," Roubini, who teaches at NYU's Stern School of Business, told attendees at the Beverly Hilton hotel.

If the issue isn't addressed, nations will either fail to meet obligations or experience higher inflation as officials "monetise" their debts, or print money to tackle the shortfalls.

Michael Milken, founder of the Milken Institute, said the US had the ability to continue selling private and public debt because its markets remained liquid.

"I would say it is individual leadership's fault if they are not taking advantage of today's markets," Milken, the junk-bond billionaire turned philanthropist, said on the panel.

Almost US$1 trillion ($1.4 trillion) of worldwide equity value was erased on Wednesday on concern that rising public debt will spur defaults, derailing the global economy, data compiled by Bloomberg show.

German Chancellor Angela Merkel and the IMF pledged to step up efforts to overcome the Greek fiscal crisis, after bonds and stocks plunged across Europe in the past week.

"The bond vigilantes are walking out in Greece, Spain, Portugal, the UK and Iceland," said Roubini, a former senior economist for the White House Council of Economic Advisers, adviser to the US Treasury Department and IMF consultant.

"Eventually, the fiscal problems of the US will also come to the fore," he said.

"The risk of something serious happening in the next two or three years is going to be significant" because there's "no willingness in Washington to do anything" unless forced by the bond markets.

Roubini, chairman and co-founder of Roubini Global Economics in New York, said the US probably would need a combination of increased tax revenue and lower government spending, while Europe needed to curb spending.

Roubini, known as Dr Doom, predicted a bubble in US housing prices during an interview with Bloomberg News in October 2005, months before the market peaked, and said in August 2006 that he expected a "painful" recession.

Yesterday he said the US had invested too heavily in housing.

- BLOOMBERG