Soros says crisis could match Great Depression

FINANCIER GEORGE Soros believes the US banking system needs $1.5 trillion (€1.1 trillion) to be saved and that the current economic crisis could be worse than the 1930s Great Depression.

Mr Soros, who made $1 billion betting on the collapse of sterling in 1992, told reporters on the first day of the World Economic Forum annual meeting in Davos that bank bailouts by taxpayers and fiscal stimulus packages would not be enough to revive the global economy.

The Hungarian-born investor said governments would eventually have to help each other because individually they lack the “borrowing power” to protect their banking systems. He said there was “very serious troubles brewing in the peripheral countries”.

He said governments needed to isolate bad assets into bad banks, leaving them with existing capital, and move good assets to new banks that can raise money privately and which are “capable and eager to lend”. He said that shareholders and pension funds would be “wiped out” and that would be “a heavy price to pay”.

“But it would cleanse the banking system,” said Mr Soros. “It is a radical step but I don’t think the political will to do is currently available. Until we do it, we are going to be bumping along and not getting the economy going.”

He suggested the International Monetary Fund (IMF) should use its own international currency, known as special drawing rights, to pump more cash into the global economy.

He made his comments as the Washington-based IMF said it risked running out of money if it had to meet all potential claims and that the global economy would grow by just 0.5 per cent in 2009, the slowest pace since the second World War. The euro-zone economy will shrink by 2 per cent this year, according to the IMF.

The IMF warned that the world economy will come to a halt as more than $2 trillion of bad assets are clogging the financial system. The fund raised its estimate of total bank losses stemming from bad loans in the US to $2.2 trillion from $1.4 trillion in October.

The IMF blamed the restriction on lending to companies and consumers as the main reason for the collapse of the global economy.

Mr Soros said the widening gap between the cost of raising money from investors in Spain, Italy, Greece and Portugal, and the rate charged to Germany, reflected “structural weakness in the construction of the euro” and the lack of a common fiscal authority.

Speaking in Davos, European Central Bank president Jean-Claude Trichet said the widening of government bond costs in the euro-zone posed no threat to the future of the currency.

Stephen Roach, head of Asian operations at US investment bank Morgan Stanley, told The Irish Times that governments must devise a way of pricing bad assets isolated in bad banks that cannot be sold. “We are not going to get the system ungummed until we do that,” he said. Earlier, he said: “We cannot underestimate the challenges and dangers the world economy faces in 2009.”

In a rare note of optimism at Davos yesterday, Chinese premier Wen Jiabao said his country had set a target of 8 per cent economic growth this year, which he said was “an attainable target through hard work”.

Russian prime minister Vladimir Putin warned it was dangerous for the world to rely on the dollar as its reserve currency.

He called for a range of reserve currencies and cautioned against isolationism and state economic control as a means of getting out of “a perfect storm” in the global economy.

The Taoiseach Brian Cowen will fly to Davos today and attend a dinner organised by IDA Ireland tonight with senior executives from international corporations.

He will participate in discussions on the global economy tomorrow before returning home later that day.