The euro, one of the items most representing the development and the union of the whole Europe, is now showing its flaw. All the members in the European Union have given up their rights to print their own money, and the European Union has its common central bank, but not a common treasury. All the member countries used to be able to borrow the euro at the common low rate, no matter how much a debt burden on their shoulders. With the economic power of Germany and France, other members such as Greece, Hungary, Ireland, Italy, etc. could get access to euro funding at very low cost, until the system has reached its limit.
Government bonds in all member countries used to be considered risk-free, and now they are considered riskiest assets. Italian and Spanish bonds, which were at the yield of 7%, were regarded as too risky as well, and its yield can easily reach to 10%. According to George Soros, he said that today we were observing a bond run, the self-fulfilling crisis of confidence in the stability of most eurozone sovereign borrowers. The long-term rate was driven up, and a temporary liquidity problem is becoming a permanent solvency problem. The bank depositors have totally lost the confidence in the stability of the institutions into which they deposit their money, so there is the threat of bank-run. That should be avoided by comprehensive guarantees of all banks by the government.
Soros commented that the bond run should be stopped at all cost because it pushes the stability of the single currency into danger. The best way to stop it in the near term is to have the ceiling on the yield of sovereign bonds issued by the governments which follow responsible fiscal policies and are not subject to adjustment programs. He wrote: “The ceiling could be initially fixed, at say 5%, and lowered gradually as conditions permit. By standing ready to buy unlimited amounts the ECB would effectively turn the interest rate ceiling into the floor from which bond prices would gradually rise without ECB actually having to buy unlimited amounts. That is what the Swiss government did successfully when it tied to the franc to the euro at 120.”
Talking about the ECB providing liquidity, it is the first out of seven points to save the eurozone laid out by George Soros. To support the stability along with the ECB providing liquidity, the European Financial Stability Facility (EFSF) would accept the solvency risks if those occur. With EFSF participation of taking Greek debt held by ECB and the IMF, Soros thinks that would re-establish the cooperation between ECB and members’ governments and allow for large voluntary Greek debt reduction. The EFSF is not used to guarantee government bonds, but the banking system. In return, the big banks would agree to take instructions from ECB acting on behalf of the governments. The banks should maintain credit lines and loans portfolio while having to control the risks with the help of the ECB.
The very important thing is to keep the wheels moving by maintaining liquidity, by the action of ECB to lower the discount rate, encourage governments to issue Treasuries and encourage banks to take these bills to keep the liquidity, instead of deposits at ECB. And the solvency risks can be guaranteed by the EFSF. Soros said that would let Italy borrow at a very low rate without ECB having to lend to member countries and to print money.
With that action, Soros wrote the last point: “Markets will be impressed by the fact that the authorities are united and have sufficient funds at their disposal. Soon Italy will be able to borrow in the market at reasonable rates. Banks can be recapitalized and the eurozone member states can agree on the common fiscal policy in the calmer atmosphere.”
Government bonds in all member countries used to be considered risk-free, and now they are considered riskiest assets. Italian and Spanish bonds, which were at the yield of 7%, were regarded as too risky as well, and its yield can easily reach to 10%. According to George Soros, he said that today we were observing a bond run, the self-fulfilling crisis of confidence in the stability of most eurozone sovereign borrowers. The long-term rate was driven up, and a temporary liquidity problem is becoming a permanent solvency problem. The bank depositors have totally lost the confidence in the stability of the institutions into which they deposit their money, so there is the threat of bank-run. That should be avoided by comprehensive guarantees of all banks by the government.
Soros commented that the bond run should be stopped at all cost because it pushes the stability of the single currency into danger. The best way to stop it in the near term is to have the ceiling on the yield of sovereign bonds issued by the governments which follow responsible fiscal policies and are not subject to adjustment programs. He wrote: “The ceiling could be initially fixed, at say 5%, and lowered gradually as conditions permit. By standing ready to buy unlimited amounts the ECB would effectively turn the interest rate ceiling into the floor from which bond prices would gradually rise without ECB actually having to buy unlimited amounts. That is what the Swiss government did successfully when it tied to the franc to the euro at 120.”
Talking about the ECB providing liquidity, it is the first out of seven points to save the eurozone laid out by George Soros. To support the stability along with the ECB providing liquidity, the European Financial Stability Facility (EFSF) would accept the solvency risks if those occur. With EFSF participation of taking Greek debt held by ECB and the IMF, Soros thinks that would re-establish the cooperation between ECB and members’ governments and allow for large voluntary Greek debt reduction. The EFSF is not used to guarantee government bonds, but the banking system. In return, the big banks would agree to take instructions from ECB acting on behalf of the governments. The banks should maintain credit lines and loans portfolio while having to control the risks with the help of the ECB.
The very important thing is to keep the wheels moving by maintaining liquidity, by the action of ECB to lower the discount rate, encourage governments to issue Treasuries and encourage banks to take these bills to keep the liquidity, instead of deposits at ECB. And the solvency risks can be guaranteed by the EFSF. Soros said that would let Italy borrow at a very low rate without ECB having to lend to member countries and to print money.
With that action, Soros wrote the last point: “Markets will be impressed by the fact that the authorities are united and have sufficient funds at their disposal. Soon Italy will be able to borrow in the market at reasonable rates. Banks can be recapitalized and the eurozone member states can agree on the common fiscal policy in the calmer atmosphere.”
