Prof. Mario Blejer: The ECB is doing everything backwards

Mario Blejer, who headed Argentina's central bank in its debt crisis, slams the ECB, and proposes 'big default' for Europe's debtors.

Professor Mario Blejer has seen a few things in his professional life. The man who is considered the Argentinean president's leading candidate for the finance portfolio, was the deputy governor of the Central Bank of Argentina and then governor at the beginning of the 2000s, the years of severe economic crisis in the country. Before that, he was for 21 years a senior advisor to the World Bank and the International Monetary Fund.

Blejer, who will be a guest at the 2011 Globes Israel Business Conference, is chairman of a mortgage bank in Argentina and sits on the boards of several companies. He is an observant Jew who took BA and MA degrees at the Hebrew University of Jerusalem and also taught there. In his well-appointed office on Reconquista Street in the heart of Buenos Aires, he presents a penetrating analysis of the global economic situation, different from that of his counterparts in the Old World.

Mario Blejer, what's your projection for the global economy in 2012?

"There is a high risk that we will slide into a crisis. We are not yet in a situation of real crisis. There are three main risks that, should they materialize, will mean that we will find ourselves in a full-blown crisis. The first is the slowdown in growth in the US. The second is the slowdown in growth in the developing economies, and the third is of course the crisis in Europe."

What is surprising in your analysis is your warning about the developing world. What's happening in that quarter?

"The especially large developing countries, like China and Brazil, grew at very high rates even after the crisis of 2008-2009, and this growth is what helped us to emerge from the previous crisis. The problem is that today there is a slowdown in these countries too, and there's a chance that it could be very severe. Its true that there's a consensus around the view that a degree of slowdown is necessary in order to prevent inflationary pressures, and there's a need for contractionary monetary and fiscal policies, but because economics is not an exact science, there is a risk that, when you act in the direction of contraction, things go too far, and the slowdown is actually greater than planned, and that's dangerous.

"It's also important to remember that these countries are dependent on demand in the developed countries, and so there's a risk that they will fall into crisis."

How do you explain the renewed slowdown in these countries?

There was a deliberate policy aimed at preventing inflationary pressures and overheating, but there were places where it wasnt possible to achieve a soft landing. For example, in Brazil, the policy was too tight and they overshot, and it now has quite serious problems. For quite a long time, Brazils real interest rate was actually the highest in the world, at 6-7%, which caused a complete halt in industrial production, much more than they wanted. It greatly harmed growth, because its a very important component. There has now been a change in direction: the Central Bank of Brazil has already cut the interest rate several times.

Are the countries of Latin America prepared for the coming crisis?

"I think that, on the whole, the region is in better shape than it was before, in the 1980s and 1990s, because the macro-economic situation is better. There is much more balance. The fiscal position of most of the countries is good. Here there's a small deficit, even a slight surplus, a very reasonable situation. The external position is also good. In many of the countries, inflation is very low.

"Many people think that this region has split off from the rest of the world. I think we are not in such a position. I believe there is still considerable dependence, chiefly through commodity prices. That continues to be something very important. If the international situation deteriorates badly and all the risks materialize, the harm here will be severe, and there will be more social unrest as a result of economic pressure."

Despite the good continental figures, Latin Americas image in general, and Argentinas image in particular, is not very encouraging.

I agree that there are a lot of things that may not be handled in the best way, but we see the world and you cannot say that things there have been handled successfully either. In Greece, everything started with the forging of deficit figures. But the Europe-wide problems began when Germany and France breached the Maastricht Treaty (which caps debt-to-GDP ratios), effectively changing the law in practice and retroactively.

The second thing that should be taken into account is that Latin America has had many crises, and when there are crises, its impossible to use tools optimally. If theres a fire, you first must put it out. Both countries and citizens get used to all kinds of ways that are not completely acceptable. But you should pay attention to the content.

As governor of the Central Bank of Argentina, Blejer coped with a debt crisis among the worst ever suffered by any Latin American country. He also had to rehabilitate the entire banking system, which had been destroyed. This is why his analysis of the debt and banking crisis in Europe is especially interesting.

"How do you see the crisis in Europe?

"In Europe, the chances of the risks materializing are particularly high. In fact, there are two crises in Europe, and each can be resolved without resolving the other. The first crisis is over sovereign debt. When interest on the debt was at 1-1.5%, it was under control. Now, with the interest rate climbing to 6-7%, it's impossible to assume that this debt can be repaid. In Greece, there is already a situation of insolvency. That's clear; the argument is over how much of the debt cannot be repaid. The new problem is that the major countries, like Italy and Spain, are getting into the same situation. That's already another crisis altogether."

The other crisis, says Blejer, is in the banking system. "Many banks in Europe are not stable. I won't say they're insolvent, but they are decidedly unstable. The main reason for this is that these countries have a great deal of debt, and there's a chance that they wont repay it. The danger therefore grows of a run on the bank, with people coming en masse to withdraw their deposits. In fact, there is such a situation in Spain and Italy. In France, it's not clear if that is what is happening, but the banks certainly do not have enough capital. To increase their capital, they have to issue shares. But because share prices are low, the share issues have to be massive, which is not to the liking of the shareholders."

So how do you solve the banking crisis?

"There's a chance that governments may have to nationalize banks."

And what will happen there in the end?

"I have no idea, and anyone who tells you he knows, I tell you: he doesn't know. The debt problem is perhaps solvable, and there are ways. That's what we did in Argentina: a big default, and a new start."

So one big default can solve the crisis?

"No. There's another problem, which stems from the existence of a single currency and a single interest rate: the competitiveness problem. Europe is not competitive. Therefore the whole euro project is problematic, and is liable to fail. To that, there is no immediate solution."

The debt crisis does have an immediate solution?

"There is a solution, not pretty or elegant, but a solution: the European Central Bank should start to buy the debt. I know that this is a suggestion that no reputable economist would have put forward a few years ago. However, it's important to remember that the US and the UK have done it."

So why doesn't it happen?

"Because the Germans control the central bank and they have a very great fear of inflation and of a massive increase in the money supply. Therefore they prevent the move. Even so, in my view this is what will happen eventually."

What will happen then?

"There will be a little inflation, which actually helps to reduce the real value of the debt, and perhaps will help the banks a lot, and the euro will be saved."

If everything is so simple, why are the Germans so opposed?

"Because they're more conservative, they have a more orderly economy, and they claim that, in the end, they will have to suffer inflation because of the sins of others. That is what the dispute is about today."

Aren't they right?

"Everyone knows that Germany has hugely, but hugely, profited from the euro, and if it collapses, the mark will be very dear, and they will not be competitive at all. By the way, they have already done all kinds of calculations showing that they will have high unemployment if the euro block breaks up. Therefore, at the end of the day, they have to decide, either to pay themselves, or to let the central bank pay."

So you recommend Europe to adopt the Argentinian model? It wasn't successful and it hurt you badly.

"Because we didn't do it well. It was unilateral and not coordinated. They have to enter insolvency. They have no other way, because there is no way to pay this debt.

"The later they do the default, the greater will be the damage and the higher the price. And they have to do it in a way that restores to the country the ability to raise and repay new debt. If you do a small default, you haven't done anything. Basically you pay the price of a default, but without exploiting its advantages, which consist, among other things, in the possibility of going out to raise money again on the markets. They say the markets have no memory. It's not true, they have a memory; the problem is that they don't care. What they care about is what will happen in the future. They don't care if you have been a good boy; they care whether you will pay from now on."

You are clearly critical of the European Central Bank.

"The European Central Bank is doing everything backwards. Today, they are buying Spanish and Italian bonds, but they are not prepared to declare how much they are buying, which bonds they have bought, and what they will do in the future. All the time, they say, 'It's temporary, we'll only do it for now,' and that's the opposite of what they ought to say.

"They have to be pragmatic. The European Central Bank is not fulfilling its function, at least, not fully. One of the most important roles of a central bank, together with the concern for inflation, is to resolve crises, or to help resolve them. Now, Mario Draghi has become governor of the ECB, and there's a problem, because he is Italian, and Italy is in trouble, and he can't really change direction immediately. That's a problem."

So now the problem is also political?

"The euro project is not a good project economically speaking, because its a political project. So when you have a political project which is not a good economic project, someone has to pay. In Europe, they want the Chinese to pay, the IMF to pay. They want anyone with money to come and pay. But they themselves must pay, because no-one else will. To wait for foreigners outside the continent to come and pay - that just won't happen."

Published by Globes [online], Israel business news - www.globes-online.com - on December 7, 2011

Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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