Here I present key take-aways from George Soros’ in depth Bloomberg interview on the current European fiscal and banking crisis, Angela Merkel, the Spanish bailout, and Greece leaving the Eurozone.
The video is also below:
Banking & Fiscal Issues
- “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.”
- Soros summarizes the forthcoming Eurozone Summit ‘fiasco’ as fatal if the fiscal disagreements are not resolved in 3 days.
- There is no union without a transfer.
- Europe needs banking union.
- Germany will only succumb if Italy and Spain really push it to the edge (Germany can live in the present situation; the others cannot)
- Europe needs a fiscal means of strengthening growth through Treasury type entity
- What is needed 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 would 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.
- Bill would be sold on a competitive basis.
- Right now there are something like over €700bn euros are kept on deposit at the European Central Bank earning a 0.25% because the interbank market has broken down, so then you have €700bn of capital that would be very happy to earn 0.75% instead of 0.25%, and the treasury bills by being truly riskless and guaranteed by the entire community, would yield in current conditions less than 1%.
- Governments should start a European unemployment scheme, paid on a European level instead of national level.
- Soros’ solutions, however, are unlikely to prove tenable in the short-term as he notes “Merkel has emerged as a strong leader”, but “unfortunately, she has been leading Europe in the wrong direction”.
- “Euro bonds are not possible because Germany would not consider euro bonds until there is a political union, and 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.
- 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 debt on reasonable terms.
- What is needed 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 would combine issuing treasury bills.
Scenario Discussion
- LTRO would be less effective now
- At 6%, 7% of Italy’s GDP goes towards paying interest, which is completely unsustainable
- Spain may need a full bailout if summit is not successful
- Financial markets have the ability to push countries into default
- Because Spain cannot print money itself
- Even if we 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 open society.
- 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 Greece
- Greece will leave the Eurozone
- It’s very hard to see how Greece can actually meet the conditions that have been set for Greece, and the Germans are determined not to modify those conditions seriously, so medium term risk
- Greece leaving the euro zone is now a real expectation, and this is what is necessary to strengthen the rest of the euro zone, since Greece can’t print money
- By printing money, a country can devalue the currency and people can lose money by buying devalued debt, but there is no danger of default.
- The fact that the individual members don’t now control the right to print money has created this situation.
- 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 Italian 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 surrendered their right to print their own money and they can be pushed into default by speculation in the financial markets.
On Angela Merkel
- Angela Merkel 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 – she is supporting a false idea, a false ideology, a false interpretation which is reinforced by reality.
- In other words, Merkel’s method works for a while until it stops working, and that is what is called a financial bubble
- Financial bubbles look very good while they are 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 Investing
- Stay in cash
- German yields are too low
- If summit turns out well, purchase industrial shares, but avoid everything else (consumer, banks)
Conclusion: We are facing conditions reminiscent to the 1930s because of policy mistakes, forgetting what we should have learned from John Maynard Keynes.
