Soros warns of major financial crisis

"Everything Has Gone Wrong": Soros Warns "Major" Financial Crisis Is Coming

Zero Hedge,

29 May, 2018

In a speech delivered Tuesday in Paris, billionaire investor George Soros warned that the world could be on the brink of another devastating financial crisis, as debt crises reemerge in Europe and a strengthening dollar pressures both the US's emerging- and developed-market rivals.

And Europe, with Italy dragging worries about the possible dissolution of the euro back to the forefront, won't be far behind. Political pressures like the dissolution of its transatlantic alliance with the US will eventually translate into economic harm. Presently, Europe is facing three pressing problems: The refugee crisis, the austerity policy that has hindered Europe's economic development, and territorial disintegration - not only Brexit, but the threat that countries like Italy might follow suit...

 “Brexit is an immensely damaging process harmful to both sides,” the billionaire exclaimed.

But in the near-term, the US's decision to pull out of the Iran deal is straining Europe's alliance with its most important Western partner just as the strengthening dollar is constricting financial conditions around the world.

Until recently, it could have been argued that austerity is working: the European economy is slowly improving, and Europe must simply persevere. But, looking ahead, Europe now faces the collapse of the Iran nuclear deal and the destruction of the transatlantic alliance, which is bound to have a negative effect on its economy and cause other dislocations.

The strength of the dollar is already precipitating a flight from emerging-market currencies. We may be heading for another major financial crisis. The economic stimulus of a Marshall Plan for Africa and other parts of the developing world should kick in just at the right time. That is what has led me to put forward an out-of-the-box proposal for financing it.

Soros's warning comes as Italian 2Y bond yields shoot higher by the most on record:

Adding to the urgency, it is no longer a "figure of speech" to claim that the EU is in "existential danger," Soros said. It's an obvious reality.

“The EU is in an existential crisis. Everything that could go wrong has gone wrong,” he said.

To escape the crisis, “it needs to reinvent itself.”

"The United States, for its part, has exacerbated the EU’s problems. By unilaterally withdrawing from the 2015 Iran nuclear deal, President Donald Trump has effectively destroyed the transatlantic alliance. This has put additional pressure on an already beleaguered Europe. It is no longer a figure of speech to say that Europe is in existential danger; it is the harsh reality."

The only way to prevent an all-out collapse, Soros explained, would be a 30 billion euro ($35.4 billion) "Marshall Plan" for Africa that Soros believes would help stem the flow of migrants into Europe, something that, Soros finally admits, is one of the biggest problems facing Europe.  The EU, Soros believes, should use its "largely unused" borrowing authority to finance the plan.

“We may be heading for another major financial crisis,” Soros said explicitly.

The alternative, Soros claims, is further "territorial disintegration" of the EU as countries that have largely suffered as a result of the monetary union contemplate leaving. To prevent this, Soros says Europe must acknowledge and address the flaws of the euro system. Perhaps the most glaring of which is that the euro created an entrenched two-tiered system of debtors and creditors.

I personally regarded the EU as the embodiment of the idea of the open society. It was a voluntary association of equal states that banded together and sacrificed part of their sovereignty for the common good. The idea of Europe as an open society continues to inspire me.

But since the financial crisis of 2008, the EU seems to have lost its way. It adopted a program of fiscal retrenchment, which led to the euro crisis and transformed the eurozone into a relationship between creditors and debtors. The creditors set the conditions that the debtors had to meet, yet could not meet. This created a relationship that was neither voluntary nor equal – the very opposite of the credo on which the EU was based.

As some will remember, Soros Fund Management - the family office that manages Soros's money, which he has mostly dedicated to his "Open Society" network of NGOs - closed most of its long-EM positions after President Trump defeated Hillary Clinton. Of course, where Soros sees danger, others see opportunity. For example, Mark Mobius "un-retired" last month to open a fund that he hopes will take advantage of opportunities amid the EM carnage, as analysts continue to see EM as the area that's most vulnerable to a re-pricing in USD.

* * *

Read the speech in full below:

The European Union is mired in an existential crisis. For the past decade, everything that could go wrong has gone wrong. How did a political project that has underpinned Europe’s postwar peace and prosperity arrive at this point?

In my youth, a small band of visionaries led by Jean Monnet transformed the European Coal and Steel Community first into the European Common Market and then the EU. People of my generation were enthusiastic supporters of the process.

I personally regarded the EU as the embodiment of the idea of the open society. It was a voluntary association of equal states that banded together and sacrificed part of their sovereignty for the common good. The idea of Europe as an open society continues to inspire me.

But since the financial crisis of 2008, the EU seems to have lost its way. It adopted a program of fiscal retrenchment, which led to the euro crisis and transformed the eurozone into a relationship between creditors and debtors. The creditors set the conditions that the debtors had to meet, yet could not meet. This created a relationship that was neither voluntary nor equal – the very opposite of the credo on which the EU was based.

As a result, many young people today regard the EU as an enemy that has deprived them of jobs and a secure and promising future. Populist politicians exploited the resentments and formed anti-European parties and movements.

Then came the refugee influx of 2015. At first, most people sympathized with the plight of refugees fleeing political repression or civil war, but they didn’t want their everyday lives disrupted by a breakdown in social services. And soon they became disillusioned by the failure of the authorities to cope with the crisis.

When that happened in Germany, the far-right Alternative für Deutschland (AfD) rapidly gained strength, making it the country’s largest opposition party. Italy has suffered from a similar experience recently, and the political repercussions have been even more disastrous: the anti-European Five Star Movement and League parties almost took over the government. The situation has been deteriorating ever since. Italy now faces elections in the midst of political chaos.

Indeed, the whole of Europe has been disrupted by the refugee crisis. Unscrupulous leaders have exploited it even in countries that have accepted hardly any refugees. In Hungary, Prime Minister Viktor Orbán based his reelection campaign on falsely accusing me of planning to flood Europe, Hungary included, with Muslim refugees.

Orbán is now posing as the defender of his version of a Christian Europe, one that challenges the values on which the EU was based. He is trying to take over the leadership of the Christian Democratic parties which form the majority in the European Parliament.

The United States, for its part, has exacerbated the EU’s problems. By unilaterally withdrawing from the 2015 Iran nuclear deal, President Donald Trump has effectively destroyed the transatlantic alliance. This has put additional pressure on an already beleaguered Europe. It is no longer a figure of speech to say that Europe is in existential danger; it is the harsh reality.

What Can Be Done?

The EU faces three pressing problems: the refugee crisis; the austerity policy that has hindered Europe’s economic development; and territorial disintegration, as exemplified by Brexit. Bringing the refugee crisis under control may be the best place to start.

I have always advocated that the allocation of refugees within Europe should be entirely voluntary. Member states should not be forced to accept refugees they don’t want, and refugees should not be forced to settle in countries where they don’t want to go.

This fundamental principle ought to guide Europe’s migration policy. Europe must also urgently reform the Dublin Regulation, which has put an unfair burden on Italy and other Mediterranean countries, with disastrous political consequences.

The EU must protect its external borders but keep them open for lawful migrants. Member states, in turn, must not close their internal borders. The idea of a “fortress Europe” closed to political refugees and economic migrants not only violates European and international law; it is also totally unrealistic.

Europe wants to extend a helping hand toward Africa and other parts of the developing world by offering substantial assistance to democratically inclined regimes. This is the right approach, as it would enable these governments to provide education and employment to their citizens, who would then be less likely to make the often dangerous journey to Europe.

By strengthening democratic regimes in the developing world, such an EU-led “Marshall Plan for Africa” would also help to reduce the number of political refugees. European countries could then accept migrants from these and other countries to meet their economic needs through an orderly process. In this way, migration would be voluntary both on the part of the migrants and the receiving states.

Present-day reality, however, falls substantially short of this ideal. First, and most importantly, the EU still lacks a unified migration policy. Each member state has its own policy, which is often at odds with the interests of other states.

Second, the main objective of most European countries is not to foster democratic development in Africa and elsewhere, but to stem the flow of migrants. This diverts a large part of the available funds to dirty deals with dictators, bribing them to prevent migrants from passing through their territory or to use repressive methods to prevent their citizens from leaving. In the long run, this will generate more political refugees.

Third, there is a woeful shortage of financial resources. A meaningful Marshall Plan for Africa would require at least €30 billion ($35.4 billion) annually for a number of years. EU member states could contribute only a small fraction of this amount. So, where could the money come from?

It is important to recognize that the refugee crisis is a European problem requiring a European solution. The EU has a high credit rating, and its borrowing capacity is largely unused. When should that capacity be put to use if not in an existential crisis? Historically, national debt always grew in times of war. Admittedly, adding to the national debt runs counter to the prevailing orthodoxy that advocates austerity; but austerity is itself a contributing factor to the crisis in which Europe finds itself.

Until recently, it could have been argued that austerity is working: the European economy is slowly improving, and Europe must simply persevere. But, looking ahead, Europe now faces the collapse of the Iran nuclear deal and the destruction of the transatlantic alliance, which is bound to have a negative effect on its economy and cause other dislocations.

The strength of the dollar is already precipitating a flight from emerging-market currencies. We may be heading for another major financial crisis. The economic stimulus of a Marshall Plan for Africa and other parts of the developing world should kick in just at the right time. That is what has led me to put forward an out-of-the-box proposal for financing it.

Without going into the details, I want to point out that the proposal contains an ingenious device, a special-purpose vehicle, that would enable the EU to tap financial markets at a very advantageous rate without incurring a direct obligation for itself or for its member states; it also offers considerable accounting benefits.

 Moreover, although it is an innovative idea, it has already been used successfully in other contexts, namely general-revenue municipal bonds in the US and so-called surge funding to combat infectious diseases.

But my main point is that Europe needs to do something drastic in order to survive its existential crisis. Simply put, the EU needs to reinvent itself.

This initiative needs to be a genuinely grassroots effort. The transformation of the Coal and Steel Community into the European Union was a top-down initiative and it worked wonders. But times have changed. Ordinary people feel excluded and ignored. Now we need a collaborative effort that combines the top-down approach of the European institutions with the bottom-up initiatives that are necessary to engage the electorate.

Of the three pressing problems, I have addressed two. That leaves territorial disintegration, exemplified by Brexit. It is an immensely damaging process, harmful to both sides. But a lose-lose proposition could be converted into a win-win situation.

Divorce will be a long process, probably taking more than five years – a seeming eternity in politics, especially in revolutionary times like the present. Ultimately, it is up to the British people to decide what they want to do, but it would be better if they came to a decision sooner rather than later. That is the goal of an initiative called Best for Britain, which I support. This initiative fought for, and helped to win, a meaningful parliamentary vote on a measure that includes the option of not leaving before Brexit is finalized.

Britain would render Europe a great service by rescinding Brexit and not creating a hard-to-fill hole in the European budget. But its citizens must express support by a convincing margin in order to be taken seriously by Europe. That is Best for Britain’s aim in engaging the electorate.

The economic case for remaining an EU member is strong, but it has become clear only in the last few months, and it will take time to sink in. During that time, the EU needs to transform itself into an organization that countries like Britain would want to join, in order to strengthen the political case.

Such a Europe would differ from the current arrangements in two key respects. 

First, it would clearly distinguish between the EU and the eurozone. Second, it would recognize that the euro has many unsolved problems, which must not be allowed to destroy the European project.

The eurozone is governed by outdated treaties that assert that all EU member states are expected to adopt the euro if and when they qualify. This has created an absurd situation where countries like Sweden, Poland, and the Czech Republic, which have made it clear that they have no intention to join, are still described and treated as “pre-ins.”

The effect is not purely cosmetic. The existing framework has converted the EU into an organization in which the eurozone constitutes the inner core, with the other members relegated to an inferior position. There is a hidden assumption at work here, namely that, while various member states may be moving at different speeds, they are all heading to the same destination. This ignores the reality that a number of EU member countries have explicitly rejected the EU’s goal of “ever closer union.”

This goal should be abandoned. Instead of a multi-speed Europe, the goal should be a “multi-track Europe” that allows member states a wider variety of choices. This would have a far-reaching beneficial effect. Currently, attitudes toward cooperation are negative: member states want to reassert their sovereignty rather than surrender more of it. But if cooperation produced positive results, sentiment might improve, and some objectives, like defense, that are currently best pursued by coalitions of the willing might attract universal participation.

Harsh reality may force member states to set aside their national interests in the interest of preserving the EU. That is what French President Emmanuel Macron urged in the speech he delivered in Aachen when he received the Charlemagne Prize, and his proposal was cautiously endorsed by German Chancellor Angela Merkel, who is painfully aware of the opposition she faces at home. If Macron and Merkel succeeded, despite all the obstacles, they would follow in the footsteps of Monnet and his small band of visionaries. But that narrow group needs to be replaced by a large upsurge of bottom-up pro-European initiatives. I and my network of Open Society Foundations will do everything we can to help those initiatives.

Fortunately, Macron, at least, is well aware of the need to broaden popular support for and participation in European reform, as his proposal for “Citizens’ Consultations” makes clear. The Trento Economic Festival, a large gathering organized by civil-society groups at a time when Italy did not have a government, will meet from May 31 to June 3. I hope it will be successful and set a good example for similar civil-society initiatives to emulate.

European Implosion Sends Panic Through Global Markets As George Soros Warns ‘We May Be Heading For Another Major Financial Crisis’

Economic Collapse Blog,

29 May, 2018

I  told you to keep your eyes on Europe.  On Tuesday, widespread panic shot through European financial markets and this deeply affected U.S. markets as well.  The Dow Jones industrial average fell 391 points, and at this point the Dow and the S&P 500 have been down for three trading sessions in a row.  But the big news is what is happening over in Europe.  Tuesday’s crash represented the largest one day move for 2 year Italian bonds ever, and Italian bank stocks are now down a whopping 24 percent from their April highs.  Overall, European banks have fallen a total of 11 percent over the last four days, and it isn’t just banks in troubled countries such as Italy and Spain that are hurting.  The biggest bank in Europe, Deutsche Bank, just keeps on tumbling and is now just barely above all-time lows.  A few days ago when I wrote that the next global economic crisis “could be just around the corner”, there were some people that criticized me for making such a statement.  Well, as you will see below, now this fact has become so obvious that even George Soros is saying it.

Those that are ignoring what is going on in Italy are making a tragic mistake.  Italy is the third largest economy in the eurozone, and even the Wall Street Journal is admitting that its bond market is “in meltdown”…

Risk aversion is back. Italy is the focal point, with its bond market in meltdown, its politics in crisis after President Sergio Mattarella blocked the formation of an antiestablishment government, and its credit rating under threat.

That is all now making bigger waves: Europe’s deepening troubles and disappointing global growth signals are sparking a sudden rally in haven bonds like U.S. Treasurys.

The next financial crisis has already arrived in Europe, and the primary reason for this crisis has to do with the giant mess that Italy’s government has become.  The following summary of the current situation comes from CNBC…

Italy has been without a government since an inconclusive vote in early March, with anti-establishment political groups abandoning their efforts to form a coalition over the weekend amid a dispute with the country’s head of state.

President Sergio Mattarella, who was installed by a previous pro-EU government, refused to accept the nomination of euroskeptic candidate Paolo Savona for economy minister on Sunday.

Instead, he set the country on a path to another snap vote by appointing former International Monetary Fund (IMF) official Carlo Cottarelli as interim prime minister.

Of course the Italian parliament will never accept Cottarelli, and it looks like we are heading for snap elections in either July or August.

What is at stake in these elections is of the utmost importance to all of Europe.  As Politico recently discussed, if the Italian people continue to move toward anti-establishment parties we could actually see Italy leave the euro or even leave the EU altogether…

Italy, the third-largest EU power once Britain leaves, may sooner or later be run by two parties who agree on little other than their apparent eagerness to break stuff. It could be Italy’s debt — a default in the trillions of euros. It could be the euro, if they follow through on past promises to hold a referendum on membership in the single currency. And what’s ultimately broken could be the EU as we know it, if any such referendum goes against Brussels, as most that have been held have done.

The EU survived Brexit, but there is a lot of doubt as to whether it could also survive a defection by Italy.

During a speech on Tuesday, George Soros soberly assessed the current state of affairs in Europe.  According to Bloomberg, at one point he stated that “we may be heading for another major financial crisis.”

It is unusual for Soros to have such a gloomy tone.  He really seemed to quite pessimistic about Europe’s future, and he even went as far to say that “everything that could go wrong has gone wrong”…

The stark warning from the billionaire money manager comes as Italian bond yields have jumped to multi-year highs and major emerging economies including Turkey and Argentina are struggling to contain the fallout from runaway inflation. Soros, who has been the object of ire by the government of his native Hungary, saved his gloomiest outlook for the EU.

“Everything that could go wrong has gone wrong,” he said, citing the refugee crisis and austerity policies that catapulted populists into power, as well as “territorial disintegration” exemplified by Brexit. “It is no longer a figure of speech to say that Europe is in existential danger; it is the harsh reality,” he said.

I must admit that I agree with his assessment of the situation in Europe.  The EU most definitely is in “existential danger”, and I believe that we are in the beginning stages of the worst financial crisis in modern European history.

So what should be expect to see in the weeks head?

Well, here are three things to keep an eye on…

#1 The chaos is likely to continue for Italian financial markets.

#2 The euro is likely to continue to fall relative to the U.S. dollar.

#3 Trouble signs are likely to continue to erupt at European banking giants such as Deutsche Bank.

I have been warning about Italy, the euro and Deutsche Bank for a very long time, but because things didn’t fall apart right away a lot of people thought that the problems had been solved.

But just because something doesn’t happen in the short-term doesn’t mean that it isn’t going to happen.  The long-term trends that are destroying Europe’s financial system took a long time to mature, and we could all see what was happening, but now we have finally reached a major crisis point.

Of course the European elite could try to “extend and pretend” by pulling a few more tricks out of their sleeves, but at some point even they will lose control.  There is only so much that can be done, and those holding the reigns of power in Europe are almost out of ammunition.

Michael Snyder is a nationally syndicated writer, media personality and political activist. He is the author of four books including The Beginning Of The End and Living A Life That Really Matters.