Money In Europe

EUROPE'S DEBT CRISIS

Euro crisis: three perspectives

By Ben Rooney September 25, 2011: 9:52 AM ET


Europe's debt crisis could trigger a global financial meltdown, said George Soros.
WASHINGTON D.C. (CNNMoney) -- George Soros, the billionaire hedge fund manager and philanthropist, warned Saturday that failing to resolve the sovereign debt crisis in Europe could lead to a "real meltdown" of the global financial system.

His remarks came while on a panel with Olli Rehn, the top economic and monetary official at the European Commission, and Gao Xiqing, the head of China's sovereign wealth fund, who also commented on the debt crisis in Europe.

Soros was by far the most pessimistic. European leaders must convince voters to help the troubled euro area nations overcome their money problems.

"The alternative is a breakdown of the global financial system, a real meltdown," he said. The process has been evolving since the collapse of investment bank Lehman Brothers in 2008, Soros added, but "this time it could not be stopped because you don't have the authorities to stop it."

Euro area nations are struggling to contain the threat of a default by Greece, something many investors and economists fear could drag down other European economies and ripple across the world financial system.

The panel discussion took place on the sidelines of the annual meeting of the International Monetary Fund and World Bank, where Greece and the euro debt crisis has been the main topic of conversation. While Soros argued that the treaties governing the European Union will ultimately need to be rewritten, he seemed to suggest that the currency and monetary union will avoid a break up.

"Clearly the euro is imperfect and needs to be improved," he said. "But you can't unscramble the omelet." With that in mind, Soros said he believes Greece will do everything it can to avoid defaulting on its debts, "but, realistically, it may not be able to."

Geithner sounds alarm on Europe

He said the "penalty interest rates" attached to the first bailout for Greece have driven the nation deeper into debt. Greece's debt load, he predicted, could soon approach 200% of its overall economic output.

"It may not be possible to avoid some form of reorganization, which if it can be properly managed, may be short of default," said Soros. He argued that this sort of "voluntary reorganization" must be carefully prepared in advance and that steps should be taken to protect the banking system from blowback.

Rehn agreed that a default by Greece is a serious matter. But noted that European leaders are working to implement proposed measures to stabilize the country and prevent a broader debt contagion. "Greece should not and will not face a default," Rehn said. "We are working with Greece in order to help Greece reform its economy and society."


News from Europe could be worse

European policymakers are pursuing a two-pronged approach, he said. They are "fighting fires" in Greece while at the same time working to rebuild the "architecture of the euro-zone." Rehn said a proposed reform of the European Financial Stability Facility, the euro area bailout fund, should be implemented by the middle of October.

He also discussed improving "financial backstops," including the possibility of issuing a common form of debt backed by the euro area nations as a group.

Gao Xiqing, the head of the China's sovereign wealth fund, suggested that resolving the current crisis will require a major cultural and social shift across Europe.

He framed the problem as a conflict between the relaxed work ethic of southern European countries, such as Greece, and the fiscal discipline of Northern countries like Germany.

G7 to tackle European debt crisis

While he described Europe's political system as a "true democracy," he said the failure of European leaders to resolve the crisis reflects the flawed structure of the euro currency and the difficulty of finding political consensus across 17 different nations. "It's clear there are some birth defects with the euro," he said. "You need to change your way of living, your way of spending."

In response to a question about so-called eurobonds, Gao did not give a clear indication that China would be eager to buy debt issued collectively by all euro area nations.

"We would like to support Europe," he said. "But as a corporation our mandate from the government is to maintain certain amount of profitability. We can't just go there and do that, we're not a savior for other people. We have to save ourselves."

First Published: September 24, 2011: 8:06 PM ET