Billionaire investor George Soros called on Europe to set up a fund to buy Italian and Spanish bonds, saying that a failure by leaders meeting this week to produce drastic measures could be fatal.
Policy makers are at an impasse as they prepare to meet in Brussels on June 28-29. That risks disaster because Europe is running out of time to show investors it will do what’s necessary to save the euro, Soros said.
“There is a disagreement on the fiscal side…Unless that is resolved in the next three days, then I am afraid the summit could turn out to be a fiasco. That could actually be fatal.”
A European Fiscal Authority should be created to purchase sovereign debt in return for Italy and Spain committing to budget cuts, Soros said in an interview with Bloomberg Television.
Funding for the purchases would come from the sale of European Treasuries, which would have low yields because they would be backed by each euro member, he said.
France and Italy are calling on Germany to take action to put an end to the debt crisis after Spain’s 10-year bond yields jumped to more than 7 percent last week, a level that economists consider unsustainable. Beyond 7 percent, Greece, Portugal and Ireland struggled to raise cash in the market and were forced to seek financial support.
Earlier German Chancellor Angela Merkel said she was against “premature” proposals for issuing euro-area bonds, arguing that such debt can’t be sold until there is a full fiscal union for the region.
Germany has also demanded that Greece, the recipient of a €240 billion ($300 billion) rescue, and other indebted countries implement budget cuts in return for rescue funds needed to make their bond payments.
“Merkel has emerged as a strong leader,” Soros said. “Unfortunately, she has been leading Europe in the wrong direction.”
Antonis Samaras, sworn in as Greece’s Prime Minister on June 20, has pledged to seek relief from austerity measures imposed on the country while keeping the bailout funds flowing.
“It is very hard to see how Greece can actually meet the conditions that have been set,” Soros said. “The Germans are absolutely determined not to modify those conditions. One has to now calculate on Greece being forced out of the euro.”
Under Soros’s plan, outlined in a paper he’s sent to EU leaders, bonds sold by the European Fiscal Authority would receive a zero-risk weighting from regulators, allowing the European Central Bank to treat them as the highest-quality collateral. That would boost demand for banks to buy the securities and ensure that their yields would be less than 1 percent, a more sustainable level than the rates Spain and Italy pay today, he said.
Neither Spain nor Italy has the ability to “print money” because they are both members of the euro, making it likelier that financial markets can push one of them out of the bloc, Soros said. Spain is likely to need a full bailout unless leaders announce drastic measures at the meeting, he added.