Soros’s eurozone solution

25th June 2012

The Guardian reports that Soros has called for the EU to set up a European Fiscal Authority that would buy underperforming debts from distressed eurozone members. The EFA would issue bonds backed by all EU countries. Soros envisages that the two main beneficiaries would be Spain and Italy which are having to pay a very high price to attract investors to their ten year bonds.

The bonds would be bought in return for restructuring in the countries concerned, but would fall short of the creation of Eurobonds issued by one eurozone country but backed by all of them.

Soros believes would then buy time for other reforms including the eventual issuance of full Eurobonds – a measure backed by, among others, France and Spain.

He says that the political union being called for by Germany before it supports many other economic measures will take a very long time to construct by which time it may be too late to save the currency.

Soros himself is gloomy, but Business Insider thinks the idea might have a chance. It writes: "Soros doesn't say it specifically, but just taking this step would probably massively improve peripheral borrowing costs (in Spain and Italy) simply thanks to the expectation that there was a path in place to take the worst-case scenario (a sovereign blowup in either of those two countries) totally off the table.

"Would the Germans ever go along with Soros' scheme? It's possible. The fact of the matter is that noises out of Merkel and Finance Minister Schauble lately have been along the lines of: If you're willing to give up fiscal control, burden sharing is possible. A big question remains on order and timeline and whether it can all be done at once."

Meanwhile the crisis elsewhere continues. Spain has made a formal request for a bailout for its banks.

However there is speculation is that rather than euro 60 billion suggested last week, Spain might need to access to euro 100 bn.

Commentators remain cynical about whether any radical action will be taken. With yet another political summit on the banking situation scheduled for later this week, Forbes magazine's Haydn Shaughnessy  predicts a long week of euro bluffing amid fundamental divisions among member states.


More on Mindful Money:

Should central banks be policy makers of last resort?

Was the Spanish bank bailout botched?

Can the rest of Europe stand up to Germany?

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The Financialist

11 thoughts on “Soros’s eurozone solution”

  1. Justathought says:

    Hi Shaun,

    …and monetary tightening suffocates the peripheral eurozone economies! Tensions are inevitably going to mount inside the Euro Group over the rise in the value of the common currency! Many clues are appearing everywhere that the EU projet might be terminal…

    1. Anonymous says:

      Hi Justathought
      I listened to the ECB press conference and thought it was kind of President Draghi to confirm my themes. His claimed successes were in the financial markets whereas as one of the questioners pointed out the economic recovery he was forcasting was getting further away!
      Oh and he found himself not guility on Banka Monte Paschi too…

      1. Andy Zarse says:

        Hi Shaun, was there any comment on Ireland and her latest proposals for AIB/NAMA?

        1. Anonymous says:

          Hi Andy

          Mario Draghi batted the ball away but did so in a way that suggested some sort of deal had been done. Rather in tune with the times it turned out that the Irish government had followed the model of Ocean Finance as it exchanged lower payments now for a longer period of debt and a higher overall debt value!

          However I note that even now there appears to be some debate over the exact figures and by how much Ireland’s fiscal deficit will be reduced….

          1. Pavlaki says:

            The ECB can call it what it wants but by doing this they are in effect making a fiscal transfer and undertaking direct support of Ireland. They can say it is only a loan but if I borrow money from you and then extend the terms of repayment so far into the future as to be meaningless then you are really just giving me the cash! If I were German, I would be really worried.

          2. Anonymous says:

            Hi Pavlaki

            As much of this is being manouevered around the balance sheet of the Central Bank of Ireland we return to who is the lender of last resort in the Eurosystem?

  2. ernie says:

    Shaun isn’t it the case that protecting the banks is so vital because they have loaded up on peripheral country debt following the 3-card trick played last year via the ECB whereby it leant money to them to buy their countries’ distressed bonds and then allowed them to pledge same bonds as collateral for the loans? Obviously if you allow a few such banks to fall over (say in Spain and Italy to name but two countries) then you have a real problem for the ECB itself. I don’t really see how the ECB is “solvent” given the collateral it currently holds and its own leverage but then I guess that’s the same for all the central banks. I realise their “solvency” isn’t treated the same, but actually the ECB is a different case as it is an uncomfortable sort of hybrid central bank.

    1. forbin says:

      the ECB will always be solvent

      its a political entity – not a real bank

      As Shaun said “It always seems to be the banks does it not? ”

      Western ‘ mocrasy has divolved to governance of the people by the banks

      why else its always the banks that get hughe sums of money ?

      Can you see any other sector getting any benefit at all ??

      on the side lines with popcorn

      this is a party were we are just spectators – you’re not invited I’m afraid ( but you’ll get the bill at the end of the evening!!)


    2. Anonymous says:

      Hi Ernie
      Believe it or believe it not but quite a few supposed experts claimed that banks loading up on the debt of their sovereign nation was a cure for all this. Business Daily on the World Service had a professor from Southampton University who kept plugging this line and they kept inviting him back! I note even they spotted the flaw as it didnt fix anything and he did not seem to be on anymore……
      However I cannot venture that he has not been back recently as a programme I used to enjoy deteriorated so much I very rarely listen now.

  3. Anonymous says:

    Hi Shaun,

    The Netherlands bill of 8.7 billion euro is added to a national debt about 65% of GDP (150 billion). So the new debt will be roughly 71% of GDP – Netherlands isn’t joining the eurozone’s bankrupt club yet.

    However the news of economic woe from Italy, Spain & France matched to the Euro’s recent strength seems to challenge the efficient markets theory.

    1. Anonymous says:

      Hi Expat
      I did not mean to imply that the Nehterlands could not afford to do this as we stand. But we know that bank bailout costs are first estimated as the minimum they might be and they invariably rise. We also know that the economy of the Netherland hit a bit of a brick wall in late 2012. So as my updates on her have suggested the going is getting tougher even in the core.

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