Greece should default on its bonds to stop a deterioration of the economy, said Mario Blejer, a former Bank of England adviser who took the reins of Argentina’s central bank after its 2001 default on $95 billion.
“Greece should default, and default big,” Blejer, who was was an adviser to Bank of England Governor Mervyn King from 2003 to 2008, said in an interview in Buenos Aires. “You can’t jump over a chasm in two steps.”
Rescue programs backed by the International Monetary Fund and European Central Bank are “recession creating” efforts that will leave Greece saddled with more debt relative to the size of its economy in coming years and stifle growth, Blejer said. A Greek default would push Portugal to do the same and would put Ireland “under tremendous pressure to at least symbolically default” on some of its debt, he added.
Blejer’s statements puts him at odds with German Chancellor Angela Merkel, who said the risks of contagion from a Greek default are too big and that an “uncontrolled insolvency” would further agitate turbulent global markets.
German coalition officials stepped up their criticism of Greece last week after a delegation from the European Commission, European Central Bank and IMF suspended a report on progress made in Athens in meeting the terms of its rescue program. The delay threatened to derail a payment to Greece due next month.
“It’s totally ridiculous what is going on,” Blejer said. “If you assume that these countries do everything that is in the program, they do all these adjustments and privatizations, at the end of 2012 debt-to-GDP will be bigger than this year.”
Greece’s government now expects the economy to shrink more than 5 percent this year, more than the 3.8 percent forecast by the European Commission, as austerity measures deepen a three- year recession. Prime Minister George Papandreou approved a plan to help repair the budget deficit at the weekend amid swelling resistance from Greeks.
It costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greece’s debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9, according to CMA.
Blejer didn’t advocated Greece leaving the euro zone, which he said would be a “very complicated” move that would force a rewriting of business contracts and would push more lenders toward bankruptcy. Germany and France will have to bear the brunt of financing efforts to help Greece and other countries that default re-start their economies, he said.
Someone Will Pay
“Someone will have to pay,” Blejer said. “If they are not willing to pay for the euro they will have to get out of the euro.”
Greece’s 10-year bond yield rose 109 basis points, or 1.09 percentage points, to 24.64 percent as of 10:50 a.m. in New York, after earlier climbing to a euro-era record of 25 percent.
Blejer took the reins of Argentina’s central bank for five months starting in January 2002, when the country was reeling from the effects of the biggest sovereign default in history and the loss of four presidents in just over two weeks. The government had just ended the peso’s one-to-one peg with the dollar when Blejer accepted the position from then-President Eduardo Duhalde.
To help stabilize the currency after the devaluation, Blejer created short-term bonds known as lebacs that paid an annual interest rate of as much as 140 percent, he said.
Argentina’s economy shrank 10.9 percent in 2002 before starting a nine-year growth streak, aided by rising commodity prices and an expansion in neighboring Brazil.
Blejer left the central bank in June 2002 after disputes with then-Economy Minister Roberto Lavagna over lifting restrictions on the withdrawal of bank deposits.
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