Tags: Roubini | Trichet | Wrong | Hikes | Rates

Roubini: It's a Mistake for Europe to Hike Rates

Monday, 07 Mar 2011 11:47 AM

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Economist Nouriel Roubini says the European Central Bank risks widening the gap between struggling periphery economies and stronger economies if it raises interest rates.

"In my view, that's a mistake," Roubini, co-founder and chairman of Roubini Global Economics told CNBC. "I think that the ECB is rushing too fast into hiking rates," he said.

“It looks like the U.S. Fed is on hold and is going to stay on hold for a while,” Roubini says. “They care more about core inflation, which is still low, while the ECB is more worried about headline inflation,” he said.

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Nouriel Roubini
“The problems of the periphery of the eurozone have barely been contained. ECB raising interest rates too soon is not going to help any economic recovery,” Roubini says.

Roubini also thinks that muni bond defaults will not exceed $100 billion and losses caused by these defaults will be even smaller, around $35 billion.

“Of course, there is uncertainty, but in the United States, there is fiscal adjustment … the states are cutting spending, they’re reforming unfunded liabilities of their own public employees pensions and healthcare assistance,” says Roubini.

“They’re going to have to raise taxes, so some small municipalities and public agencies are going to be defaulting … but we don’t expect any state to be defaulting on their own debt.”

Reuters reports that the euro was poised for a move higher as the ECB's announcement, which fortified the view the ECB will raise rates well before the U.S. Federal Reserve, had widened the gap between eurozone and U.S. government bond yields.

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