European Currency Crisis

Essay by justinh8University, Master'sA, November 2008

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Soros’ Roles1992 European Currency Crisis:Soros affected the European Currency Crisis by short selling the British pound. Due to pressure on Britain to devalue the pound by other members of the European Exchange Rate Mechanism, Britain floated its currency. Soros anticipated this move and sold his pound investments short, which earned him 1 Billion dollars. It seems that Soros actually tried to cause the collapse of the European Exchange Rate Mechanism by selling the pound short and causing other speculators to follow suit. In the end, his actions did trigger other speculators to do the same, and led to the loss of 3.4 Million pounds on “Black Wednesday”. This eventually caused Britain to leave the European Exchange Rate Mechanism to keep its value. Similar “attacks” like Soros’s occurred with Italy’s currency, which forced it to also leave the ERM. With the sudden exits of these currencies, a crisis ensued, causing the European Exchange Rate Mechanism to nearly collapse.

Update:Since the crisis, the Euro was adopted by most countries in the European Exchange Rate Mechanism. This has been beneficial in regulating the value of the region’s currency. In fact, the Euro is currently worth $1.48. However, this has stifled certain industries such as tourism and exporting given high costs for American consumers and businesses. Most recently, the US sub prime crisis is forecasted to impact European banks3, which could destabilize the currency in the region.

1997 Asian Financial Crisis:Soros did not play a part in this crisis, though many Asian leaders accused him of such, related to his involvement in the 1992 European currency crisis and his foundation’s grievances on allowing Burma to enter ASEAN. As such, being that Soro’s foundation was against the entry of Burma into ASEAN, some Asian leaders attributed mass speculation to be attributed to a Soros currency attack. They believed this attack was designed to spur a negative flow of capital in order to punish ASEAN. Though these leaders had considerable reason for suspicion that Soros was behind capital flight, they have not been able to substantiate such claims. Soro’s only financial involvement in the region that can be linked politically is his fund management group’s refusal to directly invest in Burma, along with their encouragement of companies of which they have shares in to withdraw investments in the country.

Update:It’s been more than 10 years since the crisis occurred, but the effects are still being felt. In Thailand for example, one businessman illustrates his (and fellow countryman’s) struggle across the region to maintain viability:“Today, he has recovered somewhat, but he controls only the cement division and has not built a new factory in the past 10 years.” 1This experience has raised new questions as to whether Thailand should allow foreign investors to determine the country’s future. As for now, the region as a whole is not directly affected by the U.S. sub prime crisis. 2Sources:1,germanys-ifo-institute%C2%A0asia-little-affected-by-us-subprime-crisis.html3