In an article written for the Financial Times, famed hedge fund investor George Soros says that while the makeshift assistance for Greece should do the trick, there are bigger problems facing Europe, which leaves the future of the Euro in question.
In case you are not familiar with the name, Mr. Soros is one of the most respected and successful hedge fund managers, who also knows a thing or two about analyzing and investing in currencies. On “Black Wednesday” (September 16, 1992), Mr. Soros’ funds effectively took on the Bank of England and won. Soros sold short more than $10 billion (a sum that meant something in those days) worth of pounds sterling. Soros contended that the Bank of England needed to either raise interest rates or float its currency.
After a tumultuous period, the Bank of England finally relented and withdrew the currency from the European Exchange Rate Mechanism, which devalued the pound sterling, and earned Mr. Soros a cool $1.1 billion in the process. Since that time Soros has been known as “the man who broke the Bank of England.”
So, unlike other speculators and hedge fund managers looking to profit while “talking their book,” George Soros is someone we should listen to when he speaks on the subject of foreign currencies.
In looking at the situation in Europe today, Soros writes, "A makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large of a portion of euroland to be helped in this way," Soro said. "The survival of Greece would still leave the future of the euro in question."
Soros goes on to say that the principle behind the Euro was to develop a monetary union but not a political one. Participating countries established a central bank but did not give the bank the right to tax their citizens. Soros believes the construct of the Euro was unique and one whose viability is now being tested.
Soros writes, “The construction is patently flawed… The European Union was brought into existence by putting the cart before the horse: setting limited but politically attainable targets and timetables, knowing full well that they would not be sufficient and require further steps in due course. But for various reasons the process gradually ground to a halt. The EU is now largely frozen in its present shape.
The solution? Soros believe more political involvement is the answer. He said, “Even if it [the EU] handles the current crisis, what about the next one? It is clear what is needed: more intrusive monitoring and institutional arrangements for conditional assistance. A well-organised eurobond market would be desirable. The question is whether the political will for these steps can be generated.”
While it appears that the markets have put the trouble in Greece behind them for now, many investors, including Mr. Soros, believe the issue of sovereign debt is not going to go away anytime soon. In fact, we have heard investors compare the problem of sovereign debt to the housing market bubble in the U.S. So, while stock traders may want to look ahead and not back for a while longer yet, we’d recommend keeping this issue in mind.
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