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Monday, 8 May, 2000, 11:15 GMT 12:15 UK
Soros: Euro may 'disintegrate'
Eurocurrency dealers
Currency markets are not always rational
by BBC News Online's Steve Schifferes

The international financier George Soros has said that the euro will continue to fall unless the European Central Bank intervenes to support it.

International financier George Soros
George Soros: markets must be regulated
Speaking to BBC News Online, Mr Soros said that markets would continue to view the single currency as a "one-way bet," which could easily tumble to below $0.80 and even risked "disintegration" as a currency.

Mr Soros said that the European Central Bank had enough reserves to stabilise the euro, but lacked the political will to intervene.

He said that the euro's collapse was a perfect example of "over-shooting" where markets move irrationally in the absence of direction by governments.

The new market fundamentalism is more dangerous than Communism

George Soros, international financier
Mr Soros, who runs the $12bn Quantum Fund, is believed to have lost money betting that the euro would be a strong currency.

In 1992 he made 1bn ($1.6bn) by betting that the pound sterling would be forced out of the Exchange Rate Mechanism.

But the financial speculator has now taken to warning about the dangers of unregulated capitalism in world markets.

Next crisis "in the centre"

Mr Soros warned that the world's next financial crisis was likely to originate in the relationships among the world's biggest countries, not in the "periphery" as during the Asian crisis of 1997.

In particular, he was worried about the growing imbalances in the US economy.

He warned that the US was running an unsustainable current account deficit, and that the dollar could come under pressure in the event of a stock market crash.

And he said that the consequences of a "hard landing" where the US was forced to raise interest rates to defend the dollar, would be severe for the rest of the world.

Free markets don't work

Mr Soros was scathing in his criticism of those who believed that markets can solve all problems without intervention by governments.

"The new market fundamentalism is more dangerous to the world now than Communism," he told the BBC.

"Communism at least has been discredited, while it is not understood that market fundamentalism is an equally false ideology," he said.

Mr Soros argues that markets are inherently unstable, and cannot be expected to meet social needs.

He said that unless the world gave power to the authorities to deal with global instabilities, it was understandable that countries would want to insulate themselves from a sometimes irrational global currency market.

"Much as I disagree with Dr Mahathir, (the Malaysian Prime Minister) he did quite well by imposing temporary controls (on capital flows into Malaysia) during the crisis," Mr Soros said.

"You can't blame countries for protecting themselves," he said.

But he was worried that without a real attempt at reforming the international financial system, more countries would turn to protectionism, leading to a slowdown in economic growth.

International reforms backed

Mr Soros said he was dismayed by suggestions, which have been particularly strongly held in the US, that the International Monetary Fund (IMF) was to blame for the recent world financial crisis and should be scaled down.

He said that there was an excessive fear of "moral hazard" - the belief that banks lent too much to developing countries because they thought they would always be bailed out.

That belief was leading to pressure to severely punish lenders and borrowers for their mistakes by putting harsh terms on any future IMF bail-out.

He called such proposals made in a report for the US Congress by Allan Meltzer "effectively useless" in dealing with a future crisis.

The long-term result would be a drying-up of lending to the developing world, who would either be forced to pay punitive interest rates or receive no lending at all.

Instead, Mr Soros said he favoured an insurance scheme to create a level playing field by giving explicit guarantees to lending to poorer countries, to help lower the interest rates they would have to pay.

And he would like to see the introduction of specific controls on hedge funds and other large speculative funds which are currently outside the scope of regulation.

Mr Soros spoke to the BBC at the sidelines of a conference on reforming the global economic architecture sponsored by the Centre for Economic Policy Reserch and the UK's Economic and Social Research Council.

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See also:

08 May 00 | Business
EU 'concern' about euro
29 Apr 00 | Business
Soros scales back
23 Mar 00 | Business
Growing row over IMF role
24 Sep 99 | The Economy
Reforming the IMF
16 Sep 98 | The Economy
Capitalism 'falling apart'
06 Dec 98 | The Economy
The man who broke the Bank of England
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