Tags: Soros | EU | Banks

Soros: EU Should Guarantee, Not Capitalize, Banks

Sunday, 06 Nov 2011 08:53 AM

Europe's leaders are at a critical juncture and their current plans do little to bring the continent out of the debt crisis, so they should start by guaranteeing banks, not recapitalising them, billionaire investor George Soros said.

Soros told Reuters in an interview that Europe has come to the end of its resources and therefore what it does with the funds it has secured is critical.

The euro zone expressed verbal support but could not secure any immediate extra funds from leaders of the world's major economies on Friday in Cannes, while Italy was effectively placed under IMF supervision.

Soros, speaking at the Central European University where he had held a series of lectures, said the European Financial Stability Fund, recently boosted to have a roughly 1 trillion euro ($1.380 trillion) firepower, was the right tool as long as it was used properly.

"Instead of recapitalising the banks, they should guarantee the banks..." he said. "That is convincing, because for that the EFSF has enough money."

In turn, the European Central bank should be authorised to instruct banks not to reduce their balance sheets and to keep lending, he added.

Meanwhile, European leaders should strike a deal with Italy on the conditions of borrowing, Soros said. With short-maturity treasury bills, Italy could keep borrowing and sustain its debt.

"These two steps together would reassure the markets, and in the calmer atmosphere you could resolve the issue of how you generate growth," Soros said.

He said that the 50 percent discount given on Greek debt is not enough as it applies to private sector lenders only, meaning that the danger of a disorderly default is still real.

One way to solve that would be to have the EFSF, which Soros equated to the embryo of a newly created European Treasury, guarantee Greek bonds, allowing the restructuring of all Greek debt, not only private sector debt.

"This would offer Greece an avenue... a vision of getting out of the crisis without a default," he said.

CURRENT PLAN MAY WORK, SLOWLY

Soros said that if he were still active as an investor, he would probably be "sitting on the fence like everybody else, because the situation is uncertain."

"If the authorities go down on the road which they are currently planning, which is to provide a sweetener for the bonds issued by Italy, Spain and others, then they don't have enough money," Soros said.

The sticky point was that while banks were forced to reduce their balance sheets, they would not lend or buy bonds and the credit crunch would continue both in the private sector and in the public sector, he said.

He added that the current plan of European leaders may still work but would require long months of muddling through, instead of an immediate breath of fresh air for markets.

Soros also warned that the crisis could eclipse the fall of 2008 and cause a global financial meltdown if the euro collapses - which he said leaders everywhere in Europe, particularly in Germany, have fully grasped by now.

He said new ECB President Mario Draghi was a welcome force.

"I think Mario Draghi may well provide new leadership, particularly because he knows the Italian situation and he has been very forceful in advocating Italy taking the right structural reforms to bring its debt under control."

Soros said German Chancellor Angela Merkel had made the crisis worse by trying to protect German interests too closely, adding that Merkel, too, has come around.

"Her heart is now in the right place," Soros said. "She realises she has no choice. You can't allow the euro to disintegrate, because it would sweep away the German economy as much as the other economies. You can't unscramble the omelette."

The crisis also forces European leaders to rethink the EU construct, which is flawed as it has a deep democratic deficit and was therefore unable to handle a crisis.

"Europe is destined now to work closer together because you can't allow the euro to fail. You need a common fiscal policy."

"At the same time the natural interests are divergent, so it's a shotgun marriage. People are forced to live together, not out of any great desire, but out of necessity. And that's not a very good basis."

"Europe, when it was created, was an ideal. It had great appeal. It fired people's imaginations. So you have to return to that... You have to rekindle the fire."

© 2017 Thomson/Reuters. All rights reserved.

 
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Europe's leaders are at a critical juncture and their current plans do little to bring the continent out of the debt crisis, so they should start by guaranteeing banks, not recapitalising them, billionaire investor George Soros said. Soros told Reuters in an interview that...
Soros,EU,Banks
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2011-53-06
Sunday, 06 Nov 2011 08:53 AM
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