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

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Presentation on theme: "George Soros “The Man Who Broke the Bank of England” Presented By: Vaibhav Ajmera Patricia Lopez Sabrina Madhani Shabeena Meghani Nisha Patel."— Presentation transcript:

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

3 Setting the Scene

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

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

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

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

8 George Soros: Strategy Bet $10 billion Bet $10 billion Short pounds and long in DMs Short pounds and long in DMs 1.Borrowed pounds from British banks 2.Sold pounds and bought DMs Flooded Forex market with pounds Flooded Forex market with pounds

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

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

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

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

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

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

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

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