George Soros on Germany’s view of the Euro Zone crisis and the future of Italian bonds

By Reuters Staff
January 25, 2012
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The following is an excerpt of an interview between Reuters Global Editor-at-Large Chrystia Freeland and investor George Soros.

Chrystia Freeland: With me now is George Soros, the legendary investor, philanthropist, and I think we’re allowed to call you a philosopher as well, Mr. Soros. What do you think? Do you accept that title?

George Soros: Yes. I would like to.

Chrystia Freeland : Can you enlighten us a little bit more about the German thinking, because Germany after all has done pretty fantastically with the German economy. And Germany has more at stake in the survival of Europe than any other country.

George Soros: Yes.

Chrystia Freeland: If they’re so smart, why are they doing something that you think makes so little sense?

George Soros: You look at it from their point of view. They have the most successful economy, so why can’t the rest of Europe be like them, right? It’s a very reasonable argument to make. Unfortunately it’s false because you have a closed system, the euro clearing system, where Germany is a constant creditor. Well, you can’t have everybody be a creditor in a closed system. For every creditor there has to be a debtor. The credits and the debits have to be balanced out. So the Germans are asking the impossible. It happens to work for them, and so even as Europe is pushed into a deflationary debt spiral, Germany will do relatively better than the others. Germany will continue to rise, and the heavily indebted countries that have to pay heavy risk premiums will actually be, and are already, in a recession. So the balance of trade, or competitiveness imbalance, will continue to rise. Germany will keep on going up, and the rest of Europe — well, the heavily indebted countries — will continue to sink.

Chrystia Freeland: And consequently the Germans probably will be further confirmed in their belief that they know what to do and that their policy is correct, right?

George Soros: That’s correct. And the uncertainty that now surrounds the euro is pushing down the value of the euro, which also particularly favors Germany, which is the most competitive of all the European countries.

Chrystia Freeland: Now when you talk to Germans, as I do and as I know you do, another concern that I hear from them in this whole idea of how do we rescue the euro — which I think they are determined to do, I think they are very committed to that, which is new –

George Soros: Yes, yes.

Chrystia Freeland: — is a concern that they will be taken for a ride by the weaker European economies. I think they are very concerned about soft budget constraints, and they are very worried that any rescue system has to protect them against a continued sort of spendthrift policy by Southern Europe. And don’t you think that that is part of what Germany is worried about? And aren’t they right to be worried?

George Soros: Yes. And certainly in the case of Greece they have ample reason to have that view. And that is why you have to have a two-phase program. In the first phase, austerity so that the Germans don’t have their pockets picked. But then you still have to do something about this deflationary debt spiral. And that requires stimulus. So you do need to find some stimulus. And given the constraints — that Germany itself is tied constitutionally to a balanced budget — that stimulus has to be a European stimulus led by and advocated by Germany. And I think this ought to be spelled out. In other words the leadership ought to tell the world that that’s what they want — first austerity, but immediately afterwards some form of European stimulus which involves joint and separate guarantees for –

Chrystia Freeland: Euro bonds.

George Soros: And it’s euro bonds in one guise or another. So to go there Germany has to lead the way. And I wish they had the wisdom to actually spell it out.

Chrystia Freeland: You’ve put some faith in Europe with a $2 billion purchase of the MF Global bonds. What does that say? Was that mostly a technical trade, or is that really an expression of your confidence that the acute phase of the crisis we are going to get through.

George Soros: Well, that was of course particularly attractive. I was not responsible for that because I am no longer active in actually running the portfolio.

Chrystia Freeland: But I bet they called you up and got your advice.

George Soros: If I ran the portfolio, I would have a much larger position in Italian bonds. Because if you are facing a period of deflation and you can get a yield of 6 percent on 10-year Italian bonds, that’s a fantastic yield — which is not going to stay up there the moment things settle down. So I think as a speculation, it’s a very attractive one. But it’s a very dangerous speculation because if things go wrong, the yield could blow out to 10 percent, and you would lose a very large part of your money. So at 6 percent or 7 percent Italian bonds are a speculation. At 5 percent or 4 percent I think they would be this very, very good long-term investment. It’s one of the paradoxes which shows that financial markets are not functioning the way they are supposed to.

Chrystia Freeland: It sounds as if you are ruling out the possibility of an Italian default.

George Soros: Well, I think that it can be avoided. And if it were not avoided, it would be the end of Europe. And it would also have very negative consequences all around.

 

Read more of Chrystia Freeland’s interview with George Soros here.


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