George Soros attacks Brussels rescue deal

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http://www.telegraph.co.uk/finan ... ls-rescue-deal.html

Mr Soros, who achieved world wide fame when he bet against sterling remaining within the Exchange Rate Mechanism in the 1990s, said that the 50pc "haircut" on private bond holders would only reduce Greek debt by 20pc. He said that was insufficient to stop an economic decline in Greece which would lead to greater social unrest.

His words come as the eurozone appeared to be heading for further economic trouble as investors started to express scepticism about the rescue deal announced in the early hours of Thursday morning. This weekend Goldman Sachs said that the eurozone countries were heading for a "mild recession" as confidence waned.

"Given the magnitude of the crisis it is again too little too late," Mr Soros said of the Brussels deal at a dinner organised by Pi Capital investor network on Thursday. "It will bring relief partly because the markets were so obsessed by the lack of leadership. The mere fact that something was achieved was a major relief and it will be good for any time from one day to three months.

"Unfortunately it is not the last crisis because the fundamental issues have not been settled. It is clear that the amount of debt that Greece has accumulated and is accumulating is untenable and the country is effectively insolvent."

Mr Soros argued that many banks might not voluntarily join the deal as they will want to wait for the insurance offered by the credit default swaps they hold against the debt to be triggered. At present because the haircut is voluntary European leaders have said the Greek default is not considered a "credit event" which would spark CDS payouts and possibly a new financial crisis.

"Unfortunately, the 50pc haircut is effectively less than a 20pc reduction in the overall debt [for Greece] because it only involves the private sector and excludes all the debt that is held by the ECB [European Central Bank] and the other public authorities and also the debt held by Greece because the banks, of course, will now be insolvent and the pension funds also," Mr Soros said.

"It is not at all clear that the private sector will actually deliver this voluntary cut because many of the banks are hedged by holding credit default swaps and this doesn't trigger the credit default swaps. As a private institution you could argue that it is the fiduciary responsibility of the board to look to the benefit of the bank rather than the common benefit.

"So, from the banks' point of view it is better to have a credit event where the CDS become active and protect them from the loss. That is an unsolved problem which may emerge in the next few weeks.

"The failure in terms of governance and the lack of understanding among the leadership how to deal with the market is really quite astounding. You have to lead markets, that is what they don't understand."

Yesterday, Jean Claude-Trichet, the out-going chairman of the ECB, denied allegations that the bank was being used for political ends. He insisted that any decisions made by the ECB were based on the needs of fiscal policy and that the bank was "completely independent".

The leading banking representative on the Brussels deal, Charles Dallara of the Institute of International Finance (IIF), poured cold water on the idea that a number of banks might not sign up to the voluntary haircut. "I am very optimistic that more than 90pc of banks will participate," he told the German weekly paper, Welt am Sonntag.

The head of the European rescue fund, visiting China to entice investors to back the fund, said that investors could be protected from the first 20pc of losses and that bonds could be issued in yuan.

Klaus Regling of the European Financial Stability Facility said: "The EFSF will take a certain tranche that will be a junior tranche, which means if something goes wrong, the first loss will be carried by the EFSF. It could be around 20 per cent."