RGE: Rising chance of euro zone break-up

Gina Sanchez, director of equity and asset allocation strategy for Roubini Global Economics, speaks at the Reuters Investment Outlook Summit in New York, June 8, 2010.

NEW YORK (Reuters) - The chances of a euro zone break-up have risen, although from a low probability, according to the economics and financial analysis firm of Nouriel Roubini, who famously predicted the U.S. housing crisis.

The chances of a break-up of the common currency zone has grown from a low probability of about 15 percent, Gina Sanchez, director of equity and asset allocation strategy at Roubini Global Economics, said on Tuesday.

"We are assigning a higher and higher probability to a break-up of the euro zone," Sanchez said.

"I don't want to overstate that," she said. "It is not our base case, which is they muddle through."

Behind a potential break-up is the view that the political will in euro zone countries to cut budget deficits is lacking, and that Germany cannot foot the bill, Sanchez told the Reuters Investment Outlook Summit in New York.

Sanchez declined to put an exact number on chances of a euro zone split, but she said, "We assign a probability of less than 1 percent to an easy recovery."

Worries in the euro zone over what had been a Greek sovereign debt problem that has spread to hover over Spain has made Germany a beneficiary of a lower exchange rate for the euro. Germany also had boosted competition, she said.

Roubini has said that Greece needs to restructure its sovereign debt.

The euro fell to a fresh four-year low on Monday on anxiety over debt levels in several euro zone countries. The Swiss National Bank declined to comment on speculation Tuesday that it had intervened to weaken the franc after it earlier in the day hit a fresh all-time high.

Sanchez said that over the long term inflation is likely to rise, but deflation is more of a likelihood until then.

"Our view is that in the near term there are more deflationary forces than inflationary forces, and so not a problem this year or next," she said.

The fight between inflationary and deflationary pressures is like a "balancing coin on a rim of a glass," she said.

NO U.S. DOUBLE DIP

While growth is likely to slow in the second half of the year as government stimulus plans wear off, Sanchez said RGE does not see the United States falling back into a recession.

"We don't see a double-dip," said Sanchez, who added the U.S. government will do what it can to support recovery, including keeping interest rates pat until at least the first quarter of 2011.

Increased volatility in markets has led RGE to increase its asset allocation model to bonds, Sanchez said.

The risk aversion that began in early May and continued into June should continue, Sanchez said.

"Between equity and bonds, we like bonds. The risk aversion of early May and into June will likely continue.

"What is happening is a high level of risk aversion," she said.

(Additional reporting by Daniel Bases; Editing by Padraic Cassidy)