Soros: How to End the Euro Crisis
Few have nailed the Euro crisis better than George Soros. He was on Bloomberg over the weekend discussing the crisis and what needs to be done to end it. As I’ve been saying for years now, Europe needs to eliminate the solvency crisis at the sovereign level. You do this by creating some sort of fiscal entity that essentially guarantees all sovereign debts. Something like a Treasury/Fed relationship in the USA where you eliminate the odds of a sovereign default by turning a currency user into a currency issuer. He covers many different points in the interview, but none more important than his idea of the creation of this entity to end the risk of sovereign default and Lehman 2.0:
Soros on Europe’s crisis:
“Basically there is an interrelated problem of the banking system and the excessive risk premium on sovereign debt – they are Siamese twins, tied together and you have to tackle both. It’s recognized that you have to do that and there is no widespread agreement on what to do on the banking side. It’s the beginning of a banking union and there is a disagreement on the fiscal side and unless that is resolved in the next 3 days then I am afraid that the summit could turn out to be a fiasco, and that could be fatal, because you are facing the possibility of Greece leaving the euro and perhaps the European Union and you need to strengthen the remaining euro structure to withstand that shock.”
On Angela Merkel:
“Well actually Angela Merkel has emerged as a strong leader. Unfortunately she has been leading Europe in the wrong direction. I think she is acting in good faith and that is what makes the whole situation so tragic and that is a big problem that we have in financial markets generally – that you could have a false idea, a false ideology, a false interpretation which is reinforced by reality. In other words it works for a while until it stops working and that is what is called a financial bubble – which, you know, looks very good while it is being formed and everyone believes in it and then it turns out to be unsustainable…The European Union could turn out to have been a bubble of this kind unless we realize there is this problem and we solve it and the solution is there. I think everybody can see it, all we need to do is act on it, and put on a united front, and I think that if the rest of Europe is united, I think that Germany will actually recognize it and adjust to it.”
On whether yields there’s a risk of contagion continuing if a strong proposal doesn’t come out of the EU summit:
“That is right, and there is then a serious threat of the euro breaking down and that is not to be neglected because it’s quite serious. But even if you manage to avoid, let’s say an ‘accident’ similar to what you had in 2008 with the bankruptcy of Lehman Brothers, the euro system that would emerge would actually perpetuate the divergence between creditors and debtors and would create a Europe which is very different from the Europe as an open society that fired people’s imaginations and led to the creation of the European Union. It would transform it into a hierarchical system where the division between creditors and debtors would become permanent…It would lead to Germany being in permanent domination. It would become like a German empire, and the periphery would become permanently depressed areas.”
On what Europe needs:
“What you need is a European fiscal authority that will be composed of the finance ministers but would be in charge of the various rescue mechanisms, the European Stability Mechanism, and the one that preceded it and it would be empowered to issue treasury bills, to set up a debt reduction fund and actually buy up the excess stock of that that has accumulated in the hands of particularly Italy and Spain and finally combine issuing treasury bills. Those treasury bills would yield 1% or less and that would be the relief that those countries need in order to finance their debt.”
“Euro bonds are not possible because Germany would not consider euro bonds until you have a political union, and I think it’s actually quite justified, it should come at the end of the process not at the beginning. This would be a temporary measure, limited both in time and in size, and thereby it could be authorized according to the German constitution as long as the Bundestag approves it, so it could be legal under the German constitution and under the existing treaties. What it means is the political will by Germany to put it into effect and that would create a level playing field so that Italy and Spain could actually refinance its debt on reasonable terms.”
On whether he believes Germany would be content with a smaller euro zone:
“I think Greece leaving the euro zone or being pushed out is now a real expectation and this is what is necessary to strengthen the rest of the euro zone because the way the financial markets work they can actually push a country like Italy into default – see this is what the weakness of the euro as it is currently structured because a developed country has no reason to default because it can always print money. By printing money it can devalue the currency and people can lose money by buying debt but there is no danger of default, but the fact that the individual members don’t now control the right to print money – they have given that right over to the central bank you see, and that has created this situation with a European country that could actually default and that is the risk that the financial markets price into the market and that is why say ten-year bonds yield 6% whereas British 10-year bonds yield only 1.25%. That difference is due to the fact that these countries have abandoned the, surrendered their right to print their own money and they can be pushed into default by speculation in the financial markets.”
On the chances today of Greece leaving the euro:
“It’s very hard to see how Greece can actually meet the conditions that have been set for Greece, and I think the Germans are determined not to modify those conditions seriously so I think one has to now calculate on Greece being forced out of the euro – that’s what we have to prepare for.”
On how the treasury bill would be priced:
“It would be sold on a competitive basis but right now there are something like over 700 billion euros are kept on deposit at the European Central Bank earning a quarter of one percent because the interbank market has broken down so then right then you have got 700 billion that would be very happy to earn let’s say three-quarters of a percent instead of one-quarter, and the treasury bills by being truly riskless and guaranteed by the entire community would yield current conditions less than one percent.”
On whether he believes Greece will exit the euro forever:
“No, actually it’s quite possible that it could actually, depending on how it is arranged and whether it’s orderly or disorderly, it’s possible that Greece could re-enter but what I am really afraid of and really most disturbed about is that the euro would hold together but it would create a Europe that actually nobody wanted. It would put Germany at the center of an empire which would actually be very beneficial in many ways to Germany but politically I think it would be unacceptable and it’s not something that the majority of Germans want.”
On whether German bunds are in a bubble:
“Yes…Certainly they have benefited and they are far too low-yielding if you had no world conditions, in other words the high price or low yield of the German bonds is a fever chart measuring the distress in the financial markets.”
On the chances of Spain, then Italy, needing a full-blown bailout:
“If you have this thing, then the Spanish banks would be recapitalized which would add to the debt of the Spanish debt, but if the Spanish, the excess debt is financed at 1% then it’s no problem then this will help that also and if you resume growth then the decline in the housing market would not be as severe as it would be if you have a folding economy so Spain would be also in a position to come out of the recession.”
On Mario Monti:
“Monti is a caretaker, he is a technocrat so he has no political base but I think that he would have to say that he cannot serve as a technocrat if there is no support from Germany and what would Europe do without Monti, so Monti can push Merkel but and this is in a strong position to do that because he has done his best in structural reforms and he could do more if actually this was something that didn’t come out in the discussion, that, Germany is worried that if you provide this kind of support then countries like Italy would stop pursuing structural reforms and that is not the case because by having a great benefit from it and losing the benefit if you abandon the structural reforms is I think a stronger guarantee that they will not abandon it than anything else.”
Source: Bloomberg TV
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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Cullen, as an aside. Are you familiar with why the UK needed to be bailed out by the IMF in ’76? I couldn’t find a good analysis or a breakdown of their external debt. Most of the what I found was about the government’s fear of pound devaluation (and inflation) and plugging the fiscal deficit – which makes no sense from an MMR pespective. The UK National Archive had some interesting docs (previously secret) from that time period, but didn’t seem to shed any more light than my micro-summary above.
I’m not an expert on the institutional arrangements in the UK in 1976. It was a very different environment though with high inflation and Sterling overvalued. I know they took an IMF loan so maybe they had a different institutional structure than the USA does? The USA can always harness the banks as agents of the govt. PD’s are required to bid at auctions so the idea of “running out of money” is ridiculous. And if the govt were to experience an environment where the banks revolted from that requirement (likely during a hyperinflation) the Fed would step in. Point being, an IMF loan would never be necessary in the case of the USA. But hyperinflation is a very different phenomenon than the one we’re facing currently so I see little point in discussing the odds of that occurrence here.
Thanks, I’ll try to do some more digging, although the UK event was “small enough” that I fret it’s largely been ignored by economic historians. Plus there’s so much politics involved; it’s surprising how many references there are to the “misguided policies of Labour” …
The big thing here, and one of the better contributions by MMR, is understanding these institutional relationships and how the govt can use the banks and the Fed as agents to procure funds. This is key to understanding why auctions don’t fail and why the USA will never “run out of money”. Not sure how it relates to the UK, but I guess the good thing is we don’t live in the UK in 1976.
MMR just explains how it works in the USA currently.
This piece by JKH is very good. http://monetaryrealism.com/treasury-and-the-central-bank-a-contingent-institutional-approach/
After WW II the UK owed a lot of debt to the US. Keywords: “”Lend & Lease”". The UK had to repay that debt. One of the conditions the UK was subjected to was that the UK wasn’t allowed to devalue the GBP. It broke the back of the British Empire. In the 1960s, finally the GBP was devalued. But the financial crisis resurfaced in the 1970s.
Source: Michael Hudson.
In today’s selloff I think investors are expressing their agreement with the following statement by Soros: “there is a disagreement on the fiscal side and unless that is resolved in the next 3 days then I am afraid that the summit could turn out to be a fiasco, and that could be fatal…”.
Even the very strong U.S. home sales couldn’t stop the bears today. So there would seem to be only two things that can turn it bullish: Either the EU summit is seen as successfully moving toward a viable solution, OR the ECB comes in very strong with a LTRO#3 and direct purchases of sovereign debt offered by Spain (and perhaps Italy).
Again, and again, any significant change in EU, like EURO break-up, or introduction of central fiscal authority, requires a crisis much much deeper than it is now! Where DAX trades? Just 15% down from the recent high. Last year it was much lower, and yet nothing even close to significant change happened. Any analysis needs to be realistic! Even if all of them say on the coming meeting that they are for the central fiscal authority, nothing material would happen for the next 6 months. Just look how ESM implementation got delayed.
And Soros, understanding all this pretty well, just plays his games and talks his book, nothing more. My uneducated guess he might bet on something like LTRO3 with junk collateral and enormous size of above 1b euros. Oh dear, i can only imagine how this garbage of plan is being pushed in the EU right now. Enormous money to be made out of it. Yet again, this thing, to work properly, should be enacted after the meeting fails, to ensure the right level of panic, and no resulting opposition.
Not enough pressure from popular uprisings, even in Greece. Not enough actual suffering. If it comes to real large scale scary demonstrations something finally be done. Until then, that famous can will be continue rolling down without the need for meaningful kicking. plus sa change plus a la mem chose.
I could not agree more with Soros’ view and his solutions here but once again this seems always a bit out of touch with realities on the ground in Europe (at the population level, especially in France, who will not accept the German model and the proposed reforms towards more integration). This type of crisis will certainly not be resolved this month or the next so I am not fond of the “Europe just has a few days left” type of rhetoric.
http://online.wsj.com/article/SB10001424052702304782404577486843437285650.html?mod=WSJEurope_hpp_LEFTTopStories
If the Eurozone would issue Eurobonds then Germany’s credit rating would suffer and that’s why it’s not going to happen without structural reforms in France, Spain and Greece. But France, Greece, Spain don’t want structural reforms but DO want Eurobonds.
Soros (like one C.R.) thinks that creating more debt solves the problem of a credit contraction. Perhaps he still has investments in the EURO zone that he hopes to sell before the whole “kit caboodle” breaks down.
There’s a solution: write off a lot of debt and then the EURO-zone survives. But this can only be done in combination with structural reforms and Eurobonds.
Soros is right. Prior to the summit get with Bloomber and do said interview. Inform the masses to what is missing from the architecture.
Lay out the blueprint of what must be done. Give Europe what we have. A Federal Reserve/Treasury which provides liquidity and the oil to which lubricates the financial markets.
This way they like us can fix the problem which re-occurs over and over again.
DO NOT fix the problem by holding said parties accountable….Europe must look FORWARD and not backward. Because if you look backward you might identify the flaws, the culprits and the institutions which have put you in this position.
The solution is NOT with Soros or any other person. The solution is in the markets.
They will solve every problem that the technocrats, academics and finance wizards have created. ONLY the markets will allow for a proper adjustments to those who have the money. A readjustment will occur and we will launch on a sustainable future with out these fire-starters.
The solution lies in doing nothing. He’s right. Don’t delay the issue. Allow it to occur. IN fact….I would say the purpose is to delay it. Because in this situation those who need have put those who have in a corner. Smart.
I would say after Germany beats Italy and then beats Spain….they should take the Euro 2012 cup and leave the EU.
I read the Soros article. He is proposing Fiscal Union without using those terms. A permanent transfer of sovereignty to the EU. The power to spend is the power to rule, and he would have that power transferred to an unelected elite group. If they are going to do fiscal union, they should transfer the power to spend to the European Parliament, so at least elected representatives are the ones to exercise the power.
Personally, I would rather see the EU break up into separate countries. Fiscal Union is Political Union, and that means the creation of a Frankenstein Monster that we here in the USA will regret. It will be an aggressive competitor that is twice our size, and could easily be led in the future by someone akin to Hitler or Napoleon. The British will regret EU political union too, and they know it.
Relating to comments that only crisis will produce systemic change, I’m taking the liberty of reposting a comment from an older thread (responding to one drawing a historical parallel to the Napoleonic era):
We tend to think of crisis as ‘abnormal’, but we might consider that the American and French revolutions marked a period of transformative crisis for the western world:
Then for continental Europe as a ‘system’, the outcome of the Napoleonic Wars was a turning back of the clock (orchestrated by Austria’s – and Kissinger’s role model – Count Metternich). This left root issues unresolved and simmering beneath the surface to re-emerge in revolutions in 1832 and 1848. With the latter, a united, democratic Germany seemed poised to emerge under a parliament in Frankfort (Metternich lost his nerve and bolted); but in the end, the forces of reaction got the lid back on. However, in consequence, forces that had been progressive became virulently extremist (social reform to Bolshevism and then Stalinism) and/or reactionary (nationalism to militarism and then fascism); and Germany was finally united under the aegis of Prussia. With WWI, the lid finally blew (and the three main reactionary powers, the ruling houses of Austro-Hungary, Brandenburg-Prussia and Russia, were toast. And Britain getting sucked in ended the ‘Pax Britannia’).
Partly as a consequence of it, after WWI, the crisis became truly global again (adding financial crisis/depression in the US and much of the rest, and rising militarism in Japan).
The outcome of revolution was arguably favorable for the US (which as a system, for a while operated relatively independently from the ‘Old World’), but even there, unresolved issues re-emerged in genuine crisis as Civil War, and to some extent, fed into what could be argued as another period of systemic crisis in the 1960′s.
Granted, for the US, Europe and much of the rest of the world (ex the USSR), the period from 1980 or even 1950 on could be seen as basically stable – but especially for modern Europe, periods when issues that ultimately forced transformational change were either manifesting in acute crisis. or (perhaps more dangerously), festering unresolved and unaddressed, are pretty extensive.
George Soros: “Euro bonds are not possible because Germany would not consider euro bonds until you have a political union, and I think it’s actually quite justified, it should come at the end of the process not at the beginning.”
Last year Soros claimed that Euro-Bonds will be the solution.
http://pragcap.com/you-need-this-dirty-word-eurobonds
Soros apparently learnt something from the Germans.
Soros has a major case of cognitive dissonance going on doesn’t he?
On the one hand he finally admits reality, that eurobonds are a terrible idea, then proceeds to continue embracing the underlying concept. Which one is it?
Like I said in that previous thread you linked to, I’m sick of Soros. He’s a living contradiction. He claims to value truth yet profits handsomely from deception and regularly spouts lies. He claims to endorse open society yet can only best be described as fascist in his political views. He claims to support democracy and a strong separation of powers yet here he is suggesting that European sovereign laws be ignored, democracy squashed and the will of the people ignored in the pursuit of his “grand vision”. He claims to appreciate free thought yet he pours scorn on anyone who disagrees with him and clings obsessively to his own ideas (presented appallingly badly I might add), jealously guarding what he thinks of as his genius behind a barrier of stupid obfuscation which, when you dig through, reveals very little of value.
If there’s one type of person I can’t stand above all else, it’s a fascist, particularly one who claims not to be. Here’s looking at you George.
For a long time, I was rather optimistic on Europe’s ability to find a workable solution to the sovereign debt crisis. This was before my short vacation trip to Spain. I’m absolutely shocked to have seen for myself how many houses those guys have built in the hay days and are now for sales at more than half the price they have cost to build (they are still marked to model on the books though). If you were shocked with ghost towns in China, look up Spain, they are not far behind them. Entire Airports built in the middle of nowhere, thousands of empty houses with all the modern luxury and nobody to use it.
During all that time in Spain I was just wondering what those bankers in Spain were thinking. It is their job to asses risk and make sure to guys they give the loan to is actually able to repay it someday.
It is also clear to me now that bailing out Spanish banks is not an option, the problem is far too big. Europe should do what they should have done at the begin of the crisis… let the banks fail. They are the root of the problem, bailing them out would be to reward incompetence. So let them fail and then nationalize them and then recapitalize the banks so that honest hard working people can go on with their lives and repay their debts at affordable rates for the next 25 years.
Why would you want for people to repay their debts? Most of them can’t anyways. I really like the US model where giving up the real estate is all you need to get rid of the debt. It’s not very bank friendly though.
Cheap housing is also pretty good for consumer spending I would think, more disposable income (living in a high rent town I can relate).