After the Fed, ECB,, Bank of England, and other central banks took unprecedented measures over the last month to restore liquidity and recapitalize banks, Nouriel Roubini sounded slightly less gloomy. He had deemed that the authorities has avoided a systemic financial meltdown, but a nasty, protracted recession was in the offing.
It appears that Roubini has reversed himself with his latest remarks He now says systemic risks are increasing due to hedge fund margin calls, redemptions, and liquidations, and the authorities may be forced to close financial markets. Note that this is not a new line of thought. During the turmoil of the last month, particularly the week of October 6, some professional investors were quietly discussing the possibility of short-term market closures.
From Bloomberg (hat tip readers Dwight, Saboor):
Hundreds of hedge funds will fail and policy makers may need to shut financial markets for a week or more as the crisis forces investors to dump assets, New York University Professor Nouriel Roubini said.
“We’ve reached a situation of sheer panic,” Roubini, who predicted the financial crisis in 2006, told a conference of hedge-fund managers in London today. “There will be massive dumping of assets” and “hundreds of hedge funds are going to go bust,” he said….
“Systemic risk has become bigger and bigger,” Roubini said at the Hedge 2008 conference. “We’re seeing the beginning of a run on a big chunk of the hedge funds,” and “don’t be surprised if policy makers need to close down markets for a week or two in coming days,” he said…..
Italian Prime Minister Silvio Berlusconi roiled international markets on Oct. 10, first saying world leaders were discussing shutting down global financial exchanges, and then saying he didn’t mean it.
“In a fairly Darwinian manner, many hedge funds will simply disappear,” Roman said, speaking at the same event as Roubini…
“Things are getting very ugly also in the emerging markets,” Roubini said. “The usual saying is when the U.S. sneezes, the rest of the world catches a cold. Unfortunately, this time around the U.S. is not just sneezing, it has a severe case of chronic and persistent pneumonia. It’s becoming a mess in emerging markets.”
Developing nations’ borrowing costs jumped to the highest in six years today as Belarus joined Hungary, Ukraine and Pakistan in seeking a bailout from the International Monetary Fund to help weather frozen money markets and a slump in commodities. Argentina risks defaulting for the second time this decade.
“There are about a dozen emerging markets that are now in severe financial trouble,” Roubini said. “Even a small country can have a systemic effect on the global economy,” he added. “There is not going to be enough IMF money to support them.”
Roubini, a former senior adviser to the U.S. Treasury Department, earlier this month said that the world’s biggest economy will suffer its worst recession in 40 years.
“This is the worst financial crisis in the U.S., Europe and now emerging markets that we’ve seen in a long time,” Roubini said. “Things will get much worse before they get better. I fear the worst is ahead of us.”