The Soros Solution

by Kevin D. Freeman on August 22, 2011

Billionaire hedge fund manager George Soros has shared his suggestion on how to solve the European debt crisis that has been plaguing the global financial markets. Basically, he has called for Europe to offer Euro Bonds according to an interview with Der Spiegel on August 15th:

“I think there is only one choice. It is not a question of whether Europe needs a common currency. The euro exists, and if it were to break apart, all hell would break loose. Germany has to make it work. To make it work, you have got to allow the members of the euro zone to be able to refinance the bulk of their debt on reasonable terms. So you need this dirty word: ‘euro bonds.'”

What is most interesting about this solution is the fact that Soros was reported to be involved in the genesis of the European Crisis according to a February 26, 2010 article in The Wall Street Journal:

“Some heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of the trading action at the height of the U.S. financial crisis. The big bets are emerging amid gatherings such as an exclusive “idea dinner” earlier this month that included hedge-fund titans SAC Capital Advisors LP and Soros Fund Management LLC.”

The Wall Street Journal article went on to describe the plan to take down the Euro:

Through small gatherings, hedge funds can discuss similar trades that can feed on each other, in moves similar to those criticized by some investors and bankers in 2008. Then, big hedge-fund managers, such as Greenlight Capital Inc. President David Einhorn, who also was at this month’s euro-dominated dinner, determined that the fortunes of Lehman Brothers Holdings and other firms were dim and bet heavily against their securities, accelerating their decline….

Again, derivatives, known as credit default swaps, are playing a part in the current trading. Some of the largest hedge funds, including Paulson & Co., which manages $32 billion, have bought such swaps, traders say, which act as insurance against a default by Greece on its sovereign debt. Traders view higher swaps prices as warning signs of potential default.

Notice that, according to the article, the plan to take down the Euro was to use the same weapons as were used in 2008. In his Der Spiegel interview, Soros acknowledges this:

“This crisis is still the continuation of the same crisis. In 2008, the financial system collapsed and it had to be put on artificial life support. The authorities managed to save the system. But the imbalances that caused the crisis have not been removed….Of course, speculation will always make a crisis worse. If there is a weak point, it will expose it. And you are right, the CDS market is a very dangerous instrument and I think it should not be allowed. I am one of the very few people who argue that the CDS is a dangerous instrument because it is so lop-sided in favor of a negative outcome.”

So, what can we glean from this:

1) That the attacks on Greece were the beginning of problems for Europe.
2) That Soros co-hosted a dinner to get hedge funds to turn their focus to Greece in early 2010 according to press reports.
3) That the attacks on Greece and the Euro were committed in much the same manner as attacks in 2008.
4) That Soros now suggests a common Euro bond as the only solution to the current crisis.

Two extremely important questions come from this:

The first is: How has the Euro stood up so well compared to the dollar given the nature of the current crisis?

There are two things to note from this two-year chart of the Euro from First, the Euro is HIGHER relative to the dollar than it was when the attack on Greece began. That’s pretty amazing and rather curious. Perhaps it speaks more of the dollar’s weakness than Euro strength. Having said that, the low on the Euro was experienced in May 2010. Is it a coincidence that the Germans banned naked short selling and naked Credit Default Swaps on May 19, 2010? There is no doubt that the Euro strengthened against the dollar when the surprise ban was put in effect.

George Soros provides another answer in his Der Spiegel interview:

SPIEGEL: As an investor, would you still bet on the euro?

Soros: I certainly would not short the euro because China has an interest in having an alternative to the dollar. You can count on China to back the efforts of the European authorities to maintain the euro.

SPIEGEL: Is that the reason why the euro is still so strong compared to the dollar?

Soros: Yes. There is a mysterious buyer that keeps propping up the euro.


So the answer appears to be three-fold. The Euro has appeared to hold up because the dollar has actually been even weaker since the attack on Greece began. Second, the German’s took away the economic weapons from the largest market in Europe that would be used to attack the Euro. Third, there is a very powerful buyer propping up the Euro.

All of this leads us to the second very important question to ask:  Who would benefit from a Euro bond and why?

We’ll share that answer in a forthcoming Post. It will connect the dots and fully explain the mechanism for what we have described as PHASE THREE. A hint: Believe it or not, a common Euro Bond would become a major economic weapon to be used against the United States even though it is being sold to us as a saving solution.


All posts Copyright (c) 2011 Kevin Freeman, All Rights Reserved

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