Soros's Plan To Fix Europe Is The Right Solution

Includes: FXE
by: Sammy Pollack

George Soros's plan to save the Euro is the solution. In a recent FT article here Soros outlined his plan. The basic idea of the plan is this:

The authorities would use the European Financial Stability Facility to enable the European Central Bank to act as a lender of last resort without violating its statutes. The ECB would provide almost unlimited amounts of liquidity while the EFSF guaranteed the bank against the solvency risks that it would incur. Acting together, they could resolve the liquidity problems facing the banks and enable fiscally-responsible governments to issue Treasury bills for less than 1 per cent.

In Soros's plan, the EFSF would be used to guarantee the banking system. Using the EFSF as a guarantee mechanism for the banking system is something that has not yet been discussed by EU leaders. Rather, the EFSF is slated to become a bond insurance vehicle and a source of capital for ailing banks. The EFSF is not well enough capitalized to bail out soverign nations such is Italy and Spain and the banking system.

The markets are already telling us that the EFSF is simply not sufficient to solve the crisis. Under the Soros plan, the banks will actually play a key role in solving the crisis. Without having to worry about a "run on the bank", banks will be more willing to hold onto sovereign debt. This could essentially put an end to the massive de-leveraging within the Eurozone.

With Germany completely opposed to the idea of using the ECB to solve the crisis, Soros's plan is the only other option. Eurobonds are no longer a viable solution because if Germany is having trouble selling its own bonds, who would buy a Eurobond?

Without the option of Eurobonds, ECB monetization seems to be the only way to solve the crisis, but Germany will not allow money printing. While the ECB will have to play a major role in the Soros plan, it will not have to print money to finance sovereign bonds. In the short term, the ECB will have to continue buying bonds to keep the markets from getting out of control, but in the long run, the ECB will play less of a role.

Unfortunately, EU leaders have not yet begun to consider the Soros plan. This is a plan that could actually save Europe, but it must be implemented sooner rather than later. I think the ECB, Germany, and the rest of Europe would all find common ground in much of the Soros plan. Common ground seems to be elusive with any of the other options to save the Euro.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.