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Greece Urged to Walk Away From Debt

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Mario Blejer, who managed Argentina’s central bank after the country defaulted on its sovereign debt, said Tuesday that Greece should also walk away from its bills. The former advisor to Bank of England governor Mervyn King from 2003-2008 said it was the only way for Greece to stop its economy from deteriorating further.

In a Bloomberg report, Blejer said, “This debt is unpayable. Greece should default, and default big. A small default is worse than a big default and also worse than no default.” Rescue programs devised by the International Monetary Fund and the European Central Bank, he said, are “recession-creating” and will leave Greece with even more debt in relation to the size of its economy, choking off growth.

Blejer characterized the current measures taken to contain the debt crisis as “totally ridiculous.” He added, “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.”

His comments are in direct opposition to German Chancellor Angela Merkel, who has said that a Greek default would lead to a “domino effect” throughout the euro zone and that an “uncontrolled insolvency” would cause a market disaster.

Domenico Lombardi, a former IMF board official and a senior fellow at the Brookings Institution in Washington, D.C., was quoted in the report saying that a “disorderly default” by Athens would be “a recipe for disaster.” He added, “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.”

Blejer apparently does not disagree with the latter point, since he said that if Greece defaulted, Portugal would be pushed to follow, and Ireland would be “under tremendous pressure to at least symbolically default” on some of what it owes.

But regarding the former, apparently he does disagree. He said about the various aid programs for Greece, “It doesn’t make sense to give money to Greece so Greece can pay the Germans back. All these projects, all the euro projects don’t make sense economically.”

Despite that, Blejer did not advocate Greece leaving the euro zone, saying an exit would be a “very complicated” action that would necessitate business contracts being rewritten and would also push more lenders toward bankruptcy. Instead, he said that Germany and France must shoulder the lion’s share of the cost to assist Greece and other defaulting countries restart their economies.