Today I would like to talk about the most famous international speculator of them all Geroge Soros and how he went about braking the bank of England in September 1992 and quasy single handed terminate the ERM.
I have always been very fascinated by international financial speculation and the actual power the individual investor has.
George Soros is proberbly the worlds most famous hedge fund manager in the world.George Soros was born in Budapest, Hungary in 1930. In 1947 he emigrated to England, where he graduated from the London School of Economics. While a student at the London School of Economics, In 1956 he moved to the United States, where he began to accumulate a large fortune through an international investment fund he founded and managed. Mr. Soros currently serves as Chairman of Soros Fund Management LLC, a private investment management firm which serves as principal investment advisor to the Quantum Group of Funds recognized as having the best performance record of any investment fund in the world in its thirty-year history.
Soros Philosophy is that every exchange rate is Flawed and he sat out to prove his theory in 1992 when he attacked the EMS system in late 1992.
Before the reunification of Germany the ERM had proven to one of the strongest Exchange rate systems ever created but because Germany had to be the anchor of both the its own reunification and the EMR it created a a latent flaw in the ERM. The flaw was that because of the massive capital injection from west to East Germany and the 1-1 exchange rate a high inflations pressure was developed in Germany leading to an increase of interest rates. At the same time Europe and especially Britain was in a mode of recession meaning that they were not ready for such an interest hike by the Germans.
This made the Pound very valuable and since the German bundeds bank were more focused on its own situation in regards to the reunification the brits were left on their own.
Soros was the first to see this development and after attending a meeting with the German Bundesbank President saying that he believed more in a strong mark then in the Future ECU. Emdiatly after these signals soros went ahead and tested his flaw theory and short the Italian lira. The Italians was not in a position to defend them selves and because of Germanys home problems know help came from them . This was a sign to Soros that the pound also was valnuable. Once again he sold pounds and when the British central bank in a last desperate attempt raised nterest rate 2% it was a clear indicator for Soros that the pound was untangeblr and he went ahead and sell pound even more agressivly and by the end of that day the pound had to retrieve from ERM and Soros had made one billion $
The consequences of this attact on the pound was that the Britain’s central bank wasted its reserves in an unsuccessful effort to defend the currency’s value (40 billion $). Furthermore the episode derailed Britain’s membership in a European initiative seeking to rationalize exchange rates — and it earned Soros this sobriquet: “the man who broke the Bank of England.”
Soros once again entered the international financial stage, to prove his theory that all exhange rate systems has flaws when he attaced the currencies of south East Asia.
In early 1997, Soros’ funds were shorting Thailand’s currency, the baht, and Malaysia’s currency, the ringgit — that is, betting that the value of both currencies would drop. In July, Thailand dropped its defenses, Devaluing the baht. That set off the wave of devaluations in Malaysia and elsewhere that marked the beginning of a global economic turmoil.
That conclude my little presentation on Soros and the power that speculators have in the current international financial system. However before ending I would like to hear you opinion to whether you find such speculations directly attacing counties currencies amoral and incorrect or if you believe that such actions are legitimate.