The risk of a double-dip recession is growing, especially in the euro zone, where restructuring Greece's debt is inevitable, famous economist Nouriel Roubini told CNBC Tuesday.
Moody's became the second major agency to cut Greece's debt ratings to "junk" late on Monday, as it admitted that the country does not face immediate liquidity problems due to a joint IMF/EU aid package, but that the austerity program will probably weigh on its economic growth prospects.
"I would say that the risk of a double-dip recession is highest in the euro zone… I would say there is a more than 50 percent probability," if not of a technical double-dip then of economic stagnation in the area, Roubini said.
"The downside risk to growth is significant so taking stimulus away now is a huge mistake," he warned.
There will be "massive deleveraging" of the consumer and of the private sector in the euro zone and in the UK, according to Roubini.
"What we have to do is avoid a double-dip recession," because authorities will not be able to fight it this time, he said. "The trouble is if there is a double dip there won't be the policy bullets."
Greece should restructure its debt "in an orderly manner" because even with the EU/IMF help it will not be able to shake off the burden of debt, Roubini said.
"Take Greece, even if they follow the IMF program… their public debt is going to stabilize at 145 percent debt to gross domestic product. What joke is that?"
Spain Is Worse?
In the case of Greece, the debate is not likely to be whether to restructure, but how – chaotically or in an orderly manner, he said.
Other economists have predicted that Greece will default, with one saying that this may happen as early as in August.
Spain "is worse in some ways," according to Roubini, because unemployment there has reached 20 percent, not 10 percent like in Greece, the country's housing bubble has burst and it is one of the top four economies in the euro zone. A Spanish breakdown would be "a disaster," he said.
Yields on Spanish T-bills jumped in an auction Tuesday, raising doubts over the country's credit rating as they were much higher than those on T-bills of triple-A rated peers.
"There is no calm" in the markets, Roubini said.
"Markets are now realizing that this is going to be a period of slow economic growth. I'm not doom and gloom, I'm talking about slow economic growth over the next 3 years," Roubini, who has been nicknamed "Dr. Doom," said.
Economic growth below 2 percent in the US would make for a negative outlook, and this scenario is very likely, he said.
The US economy needs to create 150,000 jobs per month to stabilize the labor market, and it is creating fewer, according to Roubini, who sees unemployment staying close to 10 percent.
The US must take advantage of the fact that euro weakness is sending money into Treasurys and think about economic growth in the short run, while having a credible fiscal plan in the medium term, Roubini added.