The US economy is in for “a lasting slowdown” and won’t recover this year, while “the banking system as a whole is basically insolvent,” billionaire investor George Soros told media on Monday.
While nationalization of banks is “out of the question,” he said stress tests being conducted by the US Treasury could be a precursor to a more successful recapitalization. But he warned about the danger of watering down mark-to-market accounting rules, saying this creates conditions for prolonging the life of US ‘zombie’ banks.
Soros also said the US dollar is under pressure and may eventually be replaced as a world reserve currency, possibly by the IMF’s Special Drawing Rights, a synthetic currency basket comprising dollars, euros, yen and sterling.
China recently proposed greater use of Special Drawing Rights, possibly as an eventual global reserve currency. “In the long run, having an international accounting unit other than the dollar may be to our advantage,” Soros said.
He added that the system that has allowed the United States to spend more than it earns has to be reformed. “That is coming to an end and it will not be allowed to recur. There will have to be some change.”
While a global recovery is possible in 2010, Soros said the timing will ultimately depend on the depth of the recession. China, he said, will be the first country to emerge from recession, probably this year, and will spearhead global growth in 2010.
He said world policy-makers are “actually beginning to catch up” with the crisis and efforts to fix structural problems in the financial system. The system was “fundamentally flawed, and there is no returning to where we came from,” he said.
In Europe, he said the crisis provides an incentive for countries that use the euro to remain inside the monetary union, though countries on the periphery still face serious problems. Soros said the euro has been “a tremendous advantage” to countries that use it, adding there’s “no question of a weaker country dropping out.”
While additional resources for the International Monetary Fund will help it stabilize struggling Eastern Europe, he said the Baltic states still face “serious problems” and Ukraine is not far from default.
Widespread use of credit default swaps has worsened the risks for Europe, he said, though he added that Germany, the euro zone’s biggest economy, is becoming more open to offering help. “Germany, which has been the most reserved about being the deep pocket of the rest of Europe, has recognized that it too has a responsibility toward the new member states,” he said.
Germany has been one of the most reluctant major economies to meet US calls for more fiscal stimulus spending to boost the global economy and fight the financial crisis. (Reuters)