Soros: Euro deal will only last one day to three months

UK newspapers report veteran investor George Soros has attacked the lack of leadership at the top of the eurozone and warned the new rescue deal to solve the debt crisis will only last between “one day and three months”.

Soros, who achieved world wide fame when he bet against sterling remaining within the Exchange Rate Mechanism in the 1990s, said the 50% “haircut” on private bond holders would only reduce Greek debt by 20%.

He said that was insufficient to stop an economic decline in Greece which would lead to greater social unrest, the Telegraph reports.

“Given the magnitude of the crisis it is again too little too late,” Soros said. “It will bring relief partly because the markets were so obsessed by the lack of leadership. The mere fact that something was achieved was a major relief and it will be good for any time from one day to three months.

“Unfortunately it is not the last crisis because the fundamental issues have not been settled. It is clear that the amount of debt that Greece has accumulated and is accumulating is untenable and the country is effectively insolvent.”

Soros argued many banks might not voluntarily join the deal as they will want to wait for the insurance offered by the credit default swaps (CDS) they hold against the debt to be triggered.

At present because the haircut is voluntary European leaders have said the Greek default is not considered a “credit event” which would spark CDS payouts and possibly a new financial crisis.

“Unfortunately, the 50% haircut is effectively less than a 20% reduction in the overall debt [for Greece] because it only involves the private sector and excludes all the debt that is held by the ECB [European Central Bank] and the other public authorities and also the debt held by Greece because the banks, of course, will now be insolvent and the pension funds also,” Soros said.

“It is not at all clear that the private sector will actually deliver this voluntary cut because many of the banks are hedged by holding credit default swaps and this doesn’t trigger the credit default swaps.

“As a private institution you could argue that it is the fiduciary responsibility of the board to look to the benefit of the bank rather than the common benefit.

“So, from the banks’ point of view it is better to have a credit event where the CDS become active and protect them from the loss. That is an unsolved problem which may emerge in the next few weeks.

“The failure in terms of governance and the lack of understanding among the leadership how to deal with the market is really quite astounding. You have to lead markets, that is what they don’t understand.”

His warning comes as the eurozone appeared to be heading for further trouble as investors criticised the rescue deal.

This weekend, Goldman Sachs said eurozone countries were heading for a “mild recession” as confidence was hit.

 

This article was first published on Investment Week

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