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Soros: Thinking the unthinkable in Europe

Friday 16 September 2011 – by George Soros / Project Syndicate

George Soros says the eurozone must prepare for the worst and take urgent steps to limit the fallout from the sovereign debt crisis. Even if it means the possibility of an orderly default by Greece and Portugal.

To resolve a crisis in which the impossible has become possible, it is necessary to think the unthinkable.

So, to resolve Europe’s sovereign-debt crisis, it is now imperative to prepare for the possibility of default and defection from the eurozone by Greece, Portugal, and perhaps Ireland.

In such a scenario, measures will have to be taken to prevent a financial meltdown in the eurozone as a whole.

First, bank deposits must be protected. If a euro deposited in a Greek bank would be lost through default and defection, a euro deposited in an Italian bank would immediately be worth less than one in a German or Dutch bank, resulting in a run on the deficit countries’ banks.

Moreover, some banks in the defaulting countries would have to be kept functioning in order to prevent economic collapse.

At the same time, the European banking system would have to be recapitalised and put under European, as distinct from national, supervision.

Finally, government bonds issued by the eurozone’s other deficit countries would have to be protected from contagion. (The last two requirements would apply even if no country defaulted.)

To read this article in full, please visit our partner site, Project Syndicate, by clicking here.

George Soros is chairman of Soros Fund Management and of the Open Society Institute.

Copyright: Project Syndicate, 2011.

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