Rogoff Predicts “A Bunch Of Sovereign Defaults”

The euro has been pressured by the Greek debt crisis since late last year. In December 2009 Greece suffered two downgrades by Moody’s and Fitch rating agencies. The Greek fiscal crisis has dragged the euro down in currency markets and many investors fear a default by the troubled EU member. Earlier in the month Harvard University Professor Kenneth Rogoff, a former economist for the International Monetary Fund, said that out of control debt may force several countries to default and could force the US to cut spending. It was Rogoff who predicted the failure of several large American banks in 2008. At a forum in Tokyo Rogoff said that following a banking crisis, “we usually see a bunch of sovereign defaults, say in a few years. I predict we will again.” Rogoff said that the United States is likely to tighten monetary policies which would in turn send “shockwaves” through markets. Rogoff also said that US fiscal policy will not be addressed until rising bond yields prompt “very painful” spending cuts and tax increases. At present the US faces an unheard of budget deficit of $1.6 trillion dollars this year.

Rogoff Pessimistic About Europe

Rogoff, who co wrote a history of the current financial crisis in 2009, told the Tokyo forum, “Most countries have reached a point where it would be much wiser to phase out fiscal stimulus. Rogoff said nations would be wise to, “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.” Rogoff said that Greece will probably be bailed out by the IMF and not the European Union. Rogoff believes that Greece will develop several austerity measures and that the EU will probably provide Greece with a bridge loan which will not save Greece in the long run. Rogoff stated, “It’s like two people getting married and saying therefore they’re living happily ever after. I don’t think Europe’s going to succeed.”

Rogoff Predicted 2008 Crisis

Rogoff believes that investors will demand higher rates to lend to debtor nations including the United States. According to last November’s IMF forecast the US’s borrowing will amount to 99.5% of annual economic output in 2011.Rogoff said that global recovery and growth will be slow. Rogoff said, “In rich countries — Germany, the United States and maybe Japan — we are going to see slow growth. They will tighten their belts when the problem hits with interest rates.” Rogoff has a reputation for accurate predictions. In 2008 just before the collapse of Lehman Brothers Rogoff warned, “the worst is yet to come in the U.S.” and also predicted the collapse of major investment banks. Rogoff’s assessment of the global financial situation is sobering.