Although stocks around the globe appear to be expecting the Eurozone to produce a game changing plan involving a leveraged, TARP-like approach, not all investors are convinced that Europe is out of the woods. In a number of recent interviews, noted financial expert, legendary hedge fund manager and philanthropist, George Soros, expressed his professional conviction and provided advice regarding Europe’s current financial crisis.
Soros believes Europe is worse off than the U.S. back in 2008 given mass uncertainty.
“It is a more dangerous situation…to the global financial system than the collapse of Lehman Brothers…” the 81-year old investor said. “Even if a catastrophe can be avoided, one thing is certain: the pressure to reduce deficits will push the euro zone into prolonged recession. This will have incalculable political consequences.”
He explained that things were different in the U.S. during the credit crisis as the U.S. Treasury Department’s preexisting authority and contingency plans helped to create and implement liquidity programs in order to stabilize and recapitalize big banks; in the process, investors gained confidence in the integrity of their deposits.
“I think that the authorities, when push comes to shove, will do whatever it takes to hold the system together, because the alternative is just too terrible to contemplate.”
Soros, typically regarded as a liberal supporter, has strongly suggested the implementation of a unified treasury for the EU to be monitored by broad European supervision.
A number of economic experts and policymakers are growing more convinced as time goes on that Greece, which has fallen behind on its fiscal goals even after two massive bailouts, will have to default.
“That may not be possible to avoid some form of reorganization…” Soros said, adding that he recommends a partial restructuring of the nation’s debt and further proposing a European bailout fund.
“It is very important from the point of the view of reassuring the markets that the possibility of default is prepared for, that in the rest of Europe arrangements are made to protect the banking system.”
In an article for the New York Review of Books and Reuters, Soros added that Portugal and Ireland might also be at risk for default, subsequently requiring the countries to leave the EU.
Furthermore, Italy and Spain have been in the hot seat as well due to pressure from bond markets over their debts, both public and in the banking industry resulting in weak growth. Yet, so it seems, the economies in those nations are too large to be save by a broad European rescue fund.
Soros fears this could have negative ramifications for the world market.
“I think that you could have two or three of the small countries default or leave the euro provided it is prepared and done in an orderly way,” Soros said. “If it were to happen unprepared, it could actually disrupt the global financial system.”
Despite his recommendation of a unified treasury, he concedes the controversy tied to the concept.
“Creating the common Treasury does not necessarily mean political union.”
Particularly this seems to be the case in Germany, where strong opposition exists to bailing out southern European nations viewed as wasteful.
Back on the home front- Soros says the U.S. is already in the thick of a double dip, despite debates of whether a new recession will take place in the near future. The financier accuses Republican’s stubbornness and refusal of President Obama’s fiscal stimulus plans for the nation’s barely-there growth.
Given that previous plans have been snubbed, Soros leaves the economy in the hands of the electorate come next voting season.
By. David Moenning of Top Stock Portfolios