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Billionaire investor George Soros called on Europe to start a fund to buy Italian and Spanish bonds, warning that a failure by leaders meeting this week to produce drastic measures could spell the demise of the currency.
Policy makers should create a European Fiscal Authority to purchase sovereign debt in return for Italy and Spain implementing achievable budget cuts, Soros said in an interview in London yesterday. Funding for the purchases would come from the sale of European Treasuries, which would have low yields because they would be backed by each euro member, he said.
France and Italy are urging Germany to take decisive action to end the 2 1/2-year-old debt crisis after Spain’s 10-year bond yields jumped to more than 7 percent last week, a level that economists consider unsustainable. Leaders are at an impasse as they prepare to meet in Brussels on June 28. That risks disaster because Europe is running out of time to show investors it will do what’s necessary to save the euro, Soros said.
“There is a disagreement on the fiscal side,” Soros, 81, said in an interview with Bloomberg Television’s Francine Lacqua at his home in London. “Unless that is resolved in the next three days, then I am afraid the summit could turn out to be a fiasco. That could actually be fatal.”
German Chancellor Angela Merkel said in a June 15 speech that she opposed “premature” proposals for issuing euro-area bonds, arguing that such debt can’t be sold until there is a full fiscal union for the region. Germany has also demanded that Greece, the recipient of a 240 billion-euro ($300 billion) rescue, and other indebted countries implement budget cuts in return for rescue funds needed to make their bond payments. Merkel is worsening Europe’s crisis because countries need growth, not austerity, to pay down their debt, Soros said.
“Merkel has emerged as a strong leader,” Soros said. “Unfortunately, she has been leading Europe in the wrong direction.”
Antonis Samaras, sworn in as Greece’s prime minister on June 20, has pledged to seek relief from austerity measures imposed on the country while keeping the bailout funds flowing.
“It is very hard to see how Greece can actually meet the conditions that have been set,” he said. “The Germans are absolutely determined not to modify those conditions. One has to now calculate on Greece being forced out of the euro.”
Soros made $1 billion in 1992 betting against the pound, forcing the British government to abandon a peg to a basket of European currencies.
Under Soros’s plan, outlined in a paper he’s sent to EU leaders, bonds sold by the European Fiscal Authority would receive a zero-risk weighting from regulators, allowing the European Central Bank to treat them as the highest-quality collateral. That would spur demand for banks to buy the securities and ensure that their yields would be less than 1 percent, a more sustainable level than the rates Spain and Italy pay today, he said.
Spanish and Italian borrowing costs ended last week lower, aided by speculation that European leaders will take action at the Brussels meeting. Spain’s 10-year-bond yields retreated to 6.38 percent on June 22. Comparable Italian yields slid to 5.8 percent after climbing to as much as 6.17 percent on June 18.
Neither Spain nor Italy has the ability to “print money” because they are both members of the euro, making it likelier that financial markets can push one of them out of the bloc, Soros said. Spain is likely to need a full bailout unless leaders announce drastic measures at the meeting, he added.
Creating a European equivalent to Treasuries would buy the union time to form a true political union that will ultimately lead to the sale of bonds backed by the entire bloc, Soros said. European Treasuries could be sold to the market within three to six months once an agreement is in place among leaders, he said.
“Germany will only do it if Italy and Spain really insist on it, because they are the ones who are hurting,” he said.
Soros predicted in the interview that stock and bond markets will react negatively if Europe fails to announce a plan this week to ease pressure on Spain and Italy.
Soros’s Quantum hedge fund gained about 20 percent a year on average since 1969 before he decided in 2011 to return money to outside clients. The fund now only manages assets for Soros and his family, ending an investing career that spanned more than four decades.
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