The European Central Bank (ECB) must pump liquidity into the 17-member financial system to stop a run on bonds and even slap a ceiling on yields to avoid a breakup of the currency zone, says billionaire financier George Soros.
Soros writes in a Financial Times column that policymakers should use the European Financial Stability Facility — an emergency assistance fund — to help the European Central Bank flood the economy with liquidity, a move that would aim to curb skyrocketing yields on sovereign bonds issued by indebted southern European nations.
"The financial markets are testing the ECB and want to find out what it is allowed to do. It is imperative that the ECB should not fail that test. The Central Bank must stop the bond run at all costs because it is endangering the stability of the single currency," Soros says.
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European Central Bank officials have suggested they don't want to resort to flooding the economy with more money, as such moves tend to fuel inflation rates, and have suggested governments do more.
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George Soros
(Getty Images photo) |
Soros, however, says authorities need to intervene, even if that means capping how much interest investors can demand.
"The best way to do it in the near term is to impose a ceiling on the yield of sovereign bonds issued by governments that follow responsible fiscal policies and are not subject to adjustment programs," Soros says.
"The ceiling could be initially fixed, at say 5 percent, and lowered gradually as conditions permit."
Soros adds he recognizes such a request isn't normal.
"Normally Central Banks fix only short-term interest rates but these are not normal times. Government bonds that were considered risk-free when financial institutions acquired them, and are still treated as such by the regulators, have turned into the riskiest of assets," he says.
"Italian and Spanish bonds are viewed as too risky to buy with a yield of 7 percent because they are regarded as toxic, and the yield could just as easily rise to 10 percent."
Yields rise when bond prices fall, meaning when a yield soars, investors view the bond as riskier.
Still, politicians across Europe are growing increasingly vocal in their calls for the European Central Bank to act as a lender of last resort.
"We have a hideous choice ... either a massive intervention from the ECB or a catastrophe," Polish finance minister Jacek Rostowski, whose country plans to enter the eurozone in 2015, tells German press, the AFP newswire reports.
"There is a danger of a historic economic disaster — like the Great Depression in the 1930s — that would lead to war in Europe."
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