By Eliana Raszewski and Camila Russo - Sep 14, 2011 6:18 AM GMT+0700
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Greek taxi drivers hold a banner reading "Union of Kozani" as they chant slogans during a demonstration in central Athens on September 13, 2011. Photographer: Aris Messinis/AFP/Getty Images
Sept. 14 (Bloomberg) -- Stephen Wood, the New York-based chief market strategist for Russell Investments, talks about euro region's debt crisis and the outlook for U.S. equities. Wood speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
Clashes broke out between police and demonstrators Sept. 10, 2011 as people took to the streets of Greece's second city of Thessaloniki in a mass protest against austerity measures. Photographer: Aris Messinis/AFP/Getty Images
Mario Blejer, who managed Argentina’s central bank in the aftermath of the world’s biggest sovereign default, said Greece should halt payments on its debt to stop a deterioration of the economy that threatens the European Union.
“This debt is unpayable,” Blejer, who was also an adviser to Bank of England Governor Mervyn King from 2003 to 2008, said in an interview in Buenos Aires. “Greece should default, and default big. A small default is worse than a big default and also worse than no default.”
World Bank and International Monetary Fund officials will meet in Washington Sept. 23-25 as European Union officials work to keep the currency union from unraveling and the Greek crisis worsens. Europe is facing “a full-blown banking crisis” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., in an interview yesterday.
Rescue programs backed by the IMF 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.
‘Totally Ridiculous’
“It’s totally ridiculous what is going on,” Blejer, 63, 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.”
The statements by Blejer, who ran Argentina’s central bank in the months after its default on $95 billion in debt, put 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 toward meeting the terms of its rescue program. The delay threatened to derail a payment to Greece due next month.
“It doesn’t make sense to give money to Greece so Greece can pay the Germans back,” Blejer said when asked about the aid programs. “All these projects, all the euro projects don’t make sense economically.”
‘Recipe for Disaster’
Domenico Lombardi, a former IMF board official and a senior fellow at the Brookings Institution in Washington, said a “disorderly default” in Greece would be “a recipe for disaster.”
“The spreading of the European crisis has gone so far that it would be really impossible to contain its spillover effects to the rest of the euro area,” Lombardi said in an interview.
An orderly default with private investor engagement would be better for Greece, he said.
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.
‘Very Complicated’
Blejer didn’t advocate 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 have to pay,” said Blejer, who is a vice chairman of mortgage bank Banco Hipotecario SA (BHIP) and a board member of energy company YPF SA. (YPFD) “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 94 basis points, or 0.94 percentage point, to 24.48 percent at 5 p.m. in New York, after earlier climbing to a euro-era record of 25 percent.
Italian borrowing costs also jumped at a 6.5 billion-euro ($8.8 billion) bond auction yesterday as contagion from Europe’s debt crisis leaves investors shunning the region’s most-indebted nations. Italy’s Treasury sold 3.9 billion euros of a benchmark five-year bond to yield 5.6 percent, up from 4.93 percent for similar maturity securities sold in July.
Argentina Crisis
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 its default 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.
To contact the reporters on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net; Camila Russo in Buenos Aires at crusso15@bloomberg.net
To contact the editors responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net; James Hertling at jhertling@bloomberg.net
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