[DEBATE] : US Banks Are 'Basically Insolvent' US Recovery Is Far Off, : Soros
Riaz K Tayob
riaz.tayob at gmail.com
Tue Apr 7 09:48:36 BST 2009
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
The healing of the banking system and housing markets is crucial to
recovery. "The banking system, as a whole, is basically insolvent,"
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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
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.
Current DateTime: 01:05:53 07 Apr 2009
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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
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.
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