On November 4, Top 10 billionaire George Soros, financier of leftist causes, and lightening rod of Tea Party invective, sat down for an interview with Reuters’ Crystia Freeland, and spelled out his plan to solve the European debt crisis and save the world’s economy.
At the start of the interview, Freeland asked Soros his thoughts about “the bazooka” which the markets are seeking, one that will shoot down the current European and world economic crises.
Soros replied “It actually has the bazooka in its hand provided it uses it the right way and the right way is to use it in the form of guarantees, but not guaranteeing the debt of the European countries, because that is too big. It would require $2 Trillion at least to provide that guarantee and they don’t have that money and therefore the markets realizing that would not be reassured at all. This would be a danger of running out of that money and then having no tools. But if they use it right it would be sufficient.”
He continued, “They should start first of all instead of recapitalizing the banks they should be guaranteeing the banks against default, the same way they did in 2008. Because the recapitalization of the banks at $108 billion Euros might also not be sufficient to reassure the market, but if they are guaranteed by the EFSF (European System of Financial Supervisors), that is convincing, because for that the ESFS has enough money. In exchange for that guarantee, effectively the banks would have to accept direction from the ECB (European Central Bank). The central Banks could instruct them not to reduce their balance sheets and not to let their credit run out. Having to raise that money, banks have an incentive to reduce their balance sheets, and therefore raising less money, and that creates a credit crunch, and that is part of the financial crisis. They certainly won’t be buying government bonds during that period in the next six months and that’s why guaranteeing the government bonds wouldn’t achieve its purpose either. So you guarantee the banks, the banks maintain their lending, The banking supervisors would make sure they don’t abuse that privilege and speculate for their own account, and that solves one half of the crisis. Then after there’s been an agreement about Italy, about how much they can borrow, they would have to meet the conditions imposed by the Eurozone, they could then issue treasury bills. The banks would be encouraged to hold their liquidity in the form of treasury bills, because they could sell those treasury bills to the central bank at any moment, so it’s the equivalent of cash, and it would yield more than cash, therefore, they would hold it. That would allow countries like Italy and Spain, during this crisis period, to borrow at negligible cost, less than 1% let’s say, because the ECB would lower its interest rates even further. That would make Italy again, sustainable; sustainable because the ECB has any amount of money for the purpose of providing liquidity, and at the same time, it would not violate the law against the ECB directly financing the governments. It’s a trick, but it’s a trick that would work. You guarantee the banks, the banks maintain their lending, the additional step would be for the ESFS, the newly created treasury, effectively, either taking over or guaranteeing the Greek bonds held by the Central bank against loss of value and that would enable the authorities to offer Greece reorganization of the officially held debt as well as the privately held debt. At the moment you have a voluntary offer of a 50% haircut from the private sector, that’s $206 billion, but the bonds held by the Central Bank, by the IMF, by the authorities is not included. This would offer Greece an avenue if it meets the targets and reaches lets say a primary surplus, that the official debt would also be exchanged. It could be exchanged into zero coupon bonds maturing after ten years, in equal installments. So Greece would have a vision of getting out of the crisis without a default, and the money that has fled Greece would come back, the economy would restart and the publicly held assets could be sold to the private sector and the whole program would actually work.
Freeland then asked Soros what would happen if the European leaders ignored his advice, what would happen? He refused to speculate on that, but he did acknowledge, “a 180 percent (sic) turn in the attitude of the German authorities. They realize that by doing too little too late, they’ve allowed the crisis to get bigger and bigger, but they can’t go on this road any more, because they don’t have any more to bring to the table than what they’ve got. So they are determined now to solve the issue. So it’s just a question of undertaking it the right way.”
Freeland asked if he “felt there was a moment earlier when they either thought the situation was not so severe, or maybe even that it was possible to allow some of these countries to fall out of the Eurozone?” Soros’s responded that “the German constitutional court made a decision that said so far but no further… there can’t be anything more without the explicit consent of the Bundestag. And so that’s the end of the road. And that is what has led Angela Merkel to realize that having been the creator of the crisis; she has also got to become the solution of the crisis.”
Freeland pressed him about what he meant that “Angela Merkel is the creator of the crisis?”
He responded, “Well going back into history, when the finance ministers of Europe guaranteed the financial system, against another systemically important financial institution failing, like Lehman Brothers, then Angela Merkel declared yes, but this guarantee applies, each country has to apply it separately, not together. So you have to have a national solution, not a European solution. And that was the first step toward the disintegration of the European Union, which has since then gathered momentum.”
Freeland then asked, “isn’t it really as you say a very fragile situation because as you’ve said there is enough money now, to persuade markets now that the banks and the sovereigns are solvent, but it has to be deployed in a very particular way. We don’t have evidence right now that they’re going to deploy it in this way.”
Soros answered, “That’s correct. This crisis is bigger, or potentially bigger than the crisis of 2008 because we have survived the crash of 2008, and we haven’t yet survived this one. There is danger if they get it wrong, that you have a financial meltdown. If there is a disorderly default in Greece and the rest of the Eurozone has not been insulated from contagion, then you could have a meltdown not only of the Greek financial system, but of the European and in fact of the global financial system, because we are so interconnected today. If they followed the path that I’ve outlined, you would have an immediate turnaround in the financial markets. If they go the other way, then you have a six month muddle through period, because that’s when banks have to recapitalize. They will be trying to reduce their balance sheets etc. So the credit crunch would continue and there’s a doubt whether the guarantee would bring down the interest rates on the Italian government bonds and Spanish government bonds sufficiently. . . If my plan were to work, Europe would still be pushed into recession, so you still have to find a path to reestablish growth because the debt burden is a ratio between burden and the size of the economy. If the economy is growing, it can carry a lot more debt than if it is shrinking. So you need a growing economy to solve the debt problem, otherwise you are in a trap, a debt trap. By using austerity, reducing government spending, and wages, and prices you set up deflation and the economy shrinks. And so the burden of the debt grows. That’s a trap that created the great depression of the 1930’s and unfortunately, there’s a danger that we are going to replay this.”
Freeland concluded the interview by asking if there “has been an important shift in Europe with the amassing of the significant European war chest. Will the Europeans have another chance? Are they going to be able to muster the political will to get more money, or is this it?”
To which Soros replied, “Not under the current circumstances given the decision of the German constitutional court, there is no more money. It’s like the top money in America, it was $700 billion and that was the only one that was available and that was misused, and we are now suffering the consequences. That’s why it’s so important how this money is used now.”