[DEBATE] : US Banks Are 'Basically Insolvent' US Recovery Is Far Off, : Soros

[Riaz K Tayob]

US Recovery Is Far Off, Banks Are 'Basically Insolvent': Soros
By: Reuters | 06 Apr 2009 | 04:49 PM ET

The U.S. economy is in for a "lasting slowdown" and could face a 
Japan-style period of relatively low growth coupled with high inflation, 
billionaire investor George Soros said on Monday.

Soros, speaking to Reuters Financial Television, also warned that 
rescuing U.S. banks could turn them into "zombies" that draw the 
lifeblood of the economy, prolonging the economic slowdown.

"I don't expect the U.S. economy to recover in the third or fourth 
quarter so I think we are in for a pretty lasting slowdown," Soros said, 
adding that in 2010 there might be "something" in terms of U.S. growth.

Soros' view contrasts with the majority of economists, who expect the 
U.S. economy to stop contracting in the third quarter and resume growing 
in the fourth quarter, according to the latest monthly poll of forecasts 
conducted by Reuters.

The recovery will look like "an inverted square root sign," Soros said. 
"You hit bottom and you automatically rebound some, but then you don't 
come out of it in a V-shape recovery or anything like that. You settle 
down—step down."

The healing of the banking system and housing markets is crucial to 
recovery. "The banking system, as a whole, is basically insolvent," 
Soros said.

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What's more, the Treasury's Public-Private Investment Fund is going to 
work but it won't be enough to recapitalize the banks in a way that they 
are able to or willing to provide credit.

"What we have created now is a situation where the banks who will be 
able to earn their way out of a hole, but by doing that, they are going 
to weigh on the economy," he said. "Instead of stimulating the economy, 
they will draw the lifeblood, so to speak, of profits away from the real 
economy in order to keep themselves alive. This is the zombie bank 
situation."

The stress tests being conducted by Treasury could be a precursor to a 
more successful recapitalization of the banks, he added.

Dollar is Vulnerable

Soros, whose latest book, "The Crash of 2008 and What it Means," has 
made prescient calls during the current credit crisis.

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Exactly one year ago, he told Reuters that global losses are likely to 
top $1 trillion from the credit crisis. To date, U.S. and European banks 
have recorded more than $700 billion in losses and write-downs, as of 
Feb. 5. 2009, according to Reuters data.

Soros also said the U.S. dollar is under selling pressure and may 
eventually be replaced as a world reserve currency, possibly by the 
IMF's Special Drawing Rights, a synthetic currency basket comprised of 
dollars, euros, yen and sterling.

"I think the dollar is now under question and I think the system will 
need to be reformed, so that the United States will be subject to the 
same discipline as is imposed on other countries," said Soros, whose 
famous bet against the British pound earned his Quantum Fund $1 billion 
in 1992. "Being the main issuer of international currency, we have been 
exempt and we have abused that because we have effectively consumed 6.5 
percent more than we have produced. That is now coming to an end."

China recently proposed greater use of Special Drawing Rights, possibly 
as an eventual global reserve currency. "In the long run, having an 
international accounting unit rather than the dollar may, in fact, be to 
our advantage so we can't splurge—you know, it felt very good for 25 
years but now we are paying a very heavy price," Soros said.


China will be the first country to emerge from recession, probably this 
year, and will spearhead global growth in 2010, Soros said. He said 
world policymakers are "actually beginning to catch up" with the crisis 
and efforts to fix structural problems in the financial system.

The system was "fundamentally flawed, and there is no returning to where 
we came from," he said.

Euro Zone Not in Danger

In Europe, he said the crisis provides an incentive for countries that 
use the euro to remain inside the monetary union, though countries on 
the periphery still face serious problems.

The euro has been "a tremendous advantage" to countries that use it, 
adding there's "no question of a weaker country dropping out," Soros said.

While additional resources for the International Monetary Fund will help 
it stabilize struggling Eastern Europe, he said the Baltic states still 
face "serious problems" and Ukraine is not far from default.

Widespread use of credit default swaps has worsened the risks for 
Europe, he said, though he added that Germany, the euro zone's biggest 
economy, is becoming more open to offering help. "Germany, which has 
been the most reserved about being the deep pocket of the rest of 
Europe, has recognized that it too has a responsibility toward the new 
member states."

Germany has been one of the most reluctant major economies to meet U.S. 
calls for more fiscal stimulus spending to boost the global economy and 
fight the financial crisis.
Copyright 2009 Reuters. Click for restrictions.

http://www.cnbc.com/id/30069223