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George Soros

George Soros. “The Man Who Broke the Bank of England” Presented By: Vaibhav Ajmera Patricia Lopez Sabrina Madhani Shabeena Meghani Nisha Patel. Introduction. September 16, 1992 British pound forced out of ERM by currency speculators and British ego severely bruised

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George Soros

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  1. George Soros “The Man Who Broke the Bank of England” Presented By: Vaibhav Ajmera Patricia Lopez Sabrina Madhani Shabeena Meghani Nisha Patel

  2. Introduction • September 16, 1992 • British pound forced out of ERM by currency speculators and British ego severely bruised • The man who made it happen • George Soros, the world’s biggest currency speculator • All in a day’s work • Took home 1 billion US dollars in profit

  3. Setting the Scene

  4. Exchange Rate Mechanism • Founded in 1979 among 8 European countries • Move towards one currency • Adjustable peg system to the German mark • Largest member of the ERM • Bundesbank—Germany’s central bank • Ensured stability and flexibility • Fluctuation band around central exchange rates

  5. Germany-A Brief History • 1989—Fall of the Berlin Wall, Reunification • Focus on internal political & economic problems • 1991—Government Spending Skyrockets • Causes of Spending • Consequences: • Central Bank prints MORE MONEY • Inflation • Stimulates increase in interest rates

  6. England-a Brief History • Joined ERM in 1990 • Benefit from one currency peg • “Recession in progress” • High unemployment, high interest rates • Response to Germany’s increasing interest rate • Two options: increase interest rates or devalue • Instead, try to defend pound by building reserves

  7. International Investors Split • Most bet on bank of England Vs. • Select few predicted inevitable devaluation

  8. George Soros: Strategy • Bet $10 billion • Short pounds and long in DMs • Borrowed pounds from British banks • Sold pounds and bought DMs • Flooded Forex market with pounds

  9. England’s Defense • Goal: avoid excess supply of pounds to prevent devaluation • Strategy: use accumulated reserves to buy pounds off the market -Spent approx. 15 billion pounds

  10. Simple Economics • Soros: supply side • Bank of England: demand side • Tug of war • Supply curve shifted to right • Forces pound devaluation Soros WINS!!

  11. Black Wednesday September 16, 1992 Britain is forced out of ERM

  12. Aftermath… • Post devaluation: -Soros sells DMs -Buys back pounds for cheaper • Profit of $ 1 billion overnight!! • Foresight of stock market phenomenon

  13. England in Shambles? • Bruised ego • Bad press for Soros • Economic recovery • Steady inflation • Interest rates found “natural level” • Improvement in BOP

  14. Can History Repeat Itself? • Most currencies get attacked soon after it’s clear they’re vulnerable • Self-fulfilled crisis (one time event) • Then vs. Now • Interconnection of economies

  15. Lessons Learned… • Comes down to the fundamental concepts of economics • Governments MUST remain true to the markets • How? • Implement policies that conform with strict economic orthodoxy • Britain tried to have their cake and eat it too

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