To: elmatador who wrote (87391 ) 2/22/2012 4:34:22 AM From: Snowshoe 1 Recommendation Respond to Soros tells how to unscramble the euro zone omelet...George Soros speaks on China and other matters at Davos marketwatch.com Caixin: How big is the likelihood of the euro falling apart? Soros: The euro cannot fall apart because, if it did, the consequences would be catastrophic, because financial assets are intermingled based on a common currency. And if they became separated and had different values, you wouldn’t know whether your counter-party was bankrupt or not. So it would be a dislocation that would be out of control. What is happening now is that, increasingly, the financial system within the euro zone is being re-nationalized, so that most of Italian bonds are being held by Italian banks, Spanish bonds by Spanish banks, and so on. If that goes on for an extended period, it becomes possible for the euro to fall apart. Caixin: What will we do if the worst-case scenario happens? Soros: Well, we are moving in that direction. And of course there have been currency unions in the past that fell apart. For instance after the First World War in the Austro-Hungarian Empire, Czechoslovakia, Hungary and Austria each had a separate currency. But in the present phase, where German banks and French banks have a lot of Italian and Spanish bonds, and German banks have claims against Spanish companies and so on, to break up this union now would be catastrophic. You can’t unscramble an omelet. Once you have mixed the eggs together, you can’t separate them again. This is actually in a very gradual way happening, slowly. For an Italian bank to borrow from the central bank at 1%, and buy Italian bonds at 6% is very good arbitrage, and without risk. Because if Italy fails, then Italian banks would fail also, whether they have the bonds or not. So for them, it’s riskless. For a German bank, it would be very risky. So right now, the financial system of the euro zone is being unscrambled.
