George Soros on The Euro Crisis and Possible Solutions

George Soros on The Euro Crisis and Possible Solutions

QUESTION : The lack of access to credit on equal terms creates an uneven playing field. This is a handicap for different countries and makes it more difficult for them to regain competitiveness. What should be done?

GEORGE SOROS : It is important to recognize that this disadvantage consists of two components. One is the cost of borrowing by the government, and the other is the cost of borrowing by the private sector. Recently, since the Cyprus rescue, the private sector’s disadvantage, particularly for small and medium-size enterprises (SMEs), increased to crisis proportions. Fortunately, the authorities recognize this. The European Central Bank is discussing the possibility of using its resources to help resolve this problem. And it is very, very important what they come up with. I am hopeful that they will produce a scheme that could make a difference. If you could package the loans to SMEs and refinance them at the ECB on equal terms, that would mean that enterprises south of the Alps would be able to borrow on more or less equal terms with enterprises north of the Alps. That would be a game-changer.

I am sure that this will be resisted on legal grounds. I am not in a position to follow the battle within the ECB from the outside, but what the outcome will have a major influence on the future course of events.

It should not escape your attention that if the ECB succeeded in making credit available on equal terms, it would effectively mean a large-scale mutualization of rather risky debts. Once that happened, it would make sense to mutualize government debts as well. Guarantees have a peculiar feature: the more comprehensive and convincing they are, the less likely they are to be invoked and to result in losses. So the securitization of SME loans could be an indirect route to Eurobonds. It would certainly be a step in that direction. That is why it is bound to be resisted. But success could lead to a positive resolution of the euro crisis.

The U.S Will Default

"For a while, yes, but at some point people will wake up and realize that the U.S. will default through a depreciating currency—in other words, through printing money—or by not paying the interest on the bonds. I don't think the U.S. will stop paying the interest, but printing more money will weaken the currency and produce higher inflation in consumer prices, asset prices and commodity prices. So being in U.S. government bonds will result in losses to investors through currency depreciation."