11 Nov 2011

Abandoning a currency causes chaos and confusion

Mario Blejer, the man in charge of Argentina’s central bank when his country’s economy fell off a cliff a decade ago, tells Channel 4 News what it is like to be at the eye of the financial storm.

Mr Blejer was Governor of the Central Bank of Argentina in when the country experienced a catastrophic loss of investor confidence that triggered runs on the banks, public protests and, in 2002, the adoption of a new currency. Since then he has served as an adviser to the Governor of the Bank of England.

Speaking to Channel 4 News, he warned that the current eurozone crisis is very serious:

“The transition from one currency to another in a situation of crisis is extremely painful, is extremely difficult. You have to redenominate all the contracts, there will be a lot of firms that will not be able to pay their obligations. So I think it will be better for Greece to remain within the Euro at least during the period of the transition.

“When you are forced to change your currency, one of the things that happens is that all the contracts are not valid. You don’t have any way to know what you owe, what you own, what you are being paid because there is a change in the nature of the contract. The other problem is in the banks because if you change the currencies and the firms are not able to pay their debt to the banks, the bank may not be able to pay to the depositors. So you have a mismatch there and it is very dangerous. It can be handled, but my point is that it is very difficult to handle all these things together when you have a crisis…I am not recommending this.”

“We did have a bank run and that was a very damaging thing. In Greece at this particular time there is not a bank run, but there is a rapid erosion of the deposit which is different because, while there are no lines in front of the bank, everybody is reducing the amount of resources in the bank. So it is very dangerous in that sense. But if the rumour is that Greece is about to be thrown out of the Euro, the risk of a bank run is much higher.”

Mario Blejer, former governor of Argentina's Central Bank (Getty)

But he warned that Germany would not necessarily save Greece, saying the Germans will “try to avoid anybody falling, but they will not blink for Greece.”

However Mr Blejer considered Italy too big to fail: “if Italy failed, the whole project of the Euro may dismantle. So there is a big difference between Greece and Italy.”

He called for action from Europe’s central bank: “At the end you need the .. ECB, the centre bank that actually produces the Euro, to fulfil its function and its function is really to protect the countries from these liquidity squeezes that are created.”

He said the Euro is a political project. “It is not a good economic project, it is a political project, and when you have a political project which is not a good economic project, somebody has to pay. And who is going to pay for this – the rich one has to pay. Otherwise the political project will not exist.

“The Europeans are looking for foreign finance, they want the rest of the world to pay – the IMF, the Chinese, the Arabs. Whoever has money, has to pay. I think this is a terrible thing. The rest of the world should not pay for the failure of governments in Europe. If the rest of the world – the IMF or the Chinese – come into the market in some way to bail out some of the European countries, we will have a very negative consequence because the ECB will find an excuse not to act.”