MercoPress. South Atlantic News Agency

Roubini suggests Greece default on its debts and follow Argentina’s 2001 example

The bailout package organised by the Euro-zone a “rip-off” said the NYU professor

The economist who predicted the credit crunch and financial crisis has recommended that Greece leave the Euro, default on its debts and return to the drachma.

Nouriel Roubini, the chairman of Roubini Global Economics, writing in the Financial Times, said that this would provide Greece with the best opportunity of rebuilding its economy.

By remaining in the Euro, which is still a strong currency, Greece was relinquishing the opportunity of letting its currency devalue and become more competitive.

Mr Roubini used the examples of Argentina in 2001 and Iceland in 2008 (*), countries that left debts behind and successfully pulled their economies back to growth.

He said: “A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth, as it did in Argentina and many other emerging markets that abandoned their currency pegs”.

He called on Greece to start an orderly default and leave the Euro and called the bailout package organised by the Euro-zone a “rip-off”.

Mr Roubini said that the process would be “traumatic”, due to the capital losses for financial institutions within the Euro zone which would increase the liabilities for the Greek government, banks and firms but that these problems could be overcome.

“Of course, this process will be traumatic. The most significant problem would be capital losses for core Euro zone financial institutions. Overnight, the foreign Euro liabilities of Greece’s government, banks and companies would surge. Yet these problems can be overcome. Argentina did so in 2001, when it “pesified” its dollar debts. America actually did something similar too, in 1933 when it depreciated the dollar by 69% and repealed the gold clause”.

European finance leaders have so far not voiced this option, but with many economists convinced that a further default by Greece is inevitable, Mr Roubini urged Greece and Euro zone leaders to come up with a radical answer.

He said: “Major Euro zone banks and investors would also suffer large losses in this process, but they would be manageable too, if these institutions are properly and aggressively recapitalised.

“Like a broken marriage that requires a break-up, it is better to have rules that make separation less costly to both sides. Breaking up and divorcing is painful and costly, even when such rules exist. Make no mistake: an orderly Euro exit will be hard. But watching the slow disorderly implosion of the Greek economy and society will be much worse”.

The New York University professor accurately warned of the credit crunch and remained bearish, predicting years of pain ahead, when other commentators were looking forward to a smooth recovery.

Roubini earlier this week warned again that “we are entering a recession”. The question isn't whether there will be a double-dip, he said, but rather “how deep it will be”.

(*) Iceland enjoyed a remarkable boom between 2002 and 2007, with a booming economy and stock market. But it was built on sand.

Bank debts had grown to the equivalent to eight times the size of the economy in 2007. When the credit crunch hit, the country's economy collapsed and with no chance of ever repaying what it owed it wrote off its foreign debts - including £5bn it owed to British and Dutch savers (the respective governments provided compensation).

The approach was called “bankrupting your way to recovery”.

But devaluation of the currency boosted exports and the economy has flourished - despite disruption from two volcano eruptions. Last month, the IMF predicted GDP growth of 2.5% this year and 3.1% in 2012.