Who Makes Monetary Policy? Guys Like George Soros

August 15, 1993|By BRENDAN MURPHY

New York. -- Central bankers once did, but their influence today is rivaled by the high-volume, speed-of-light electronic markets and investors like George Soros, a brilliant Hungarian-born financial speculator.

Evidence of this is provided by the European currency crisis which has jumped from financial pages to front pages as the Leviathan world currency market compels adjustments by central banks.

Soros is not a household name, but it is one to reckon with in the global foreign exchange market where some $1 trillion in U.S. dollars, German marks and other monies changes hands every business day.

Ask the Bank of England.

Britain's central bank learned to its regret last summer that even monetary authorities court high risk when they buck the clout of Mr. Soros and lesser lights wagering on the rise and fall of currencies.

Britain was under heavy pressure to devalue the pound, which would enable it to cut interest rates and speed up economic recovery. Prime Minister John Major resisted, though, because he wanted to maintain the pound's standing in the European Monetary System.

The British Treasury borrowed $15 billion to prop up the pound with purchases -- currency market intervention. George Soros's Quantum Fund borrowed $10 billion to sell pounds in currency speculation.

It was no contest.

Mr. Soros and the investors he represents collected $1.3 billion after the British threw in the towel and devalued. The London tab loid press dubbed Mr. Soros "The Man Who Broke the Bank of England."

The incident starkly revealed the power imbalance which has arisen between the central banks and investment vehicles like Mr. Soros's. These "hedge funds," as they are called, because they typically hedge their bets using futures, options and other sopisticated strategies.

This is state-of-the art investing, on a massive scale.

Once big investors take a certain view on exchange rates, they "can more often than not make that view self-fulfilling," conceded the Bank for International Settlements in its recent annual report. The BIS is often described as the "bank for central bankers," because its role is to coordinate international monetary flows and policies.

Mr. Soros and other New York-based hedge fund managers, such as Michael Steinhardt of Steinhardt Partners and Julian Robertson of Tiger Fund and Paul Tudor Jones of Tudor Futures Fund, are the trend-setters for the highly reactive international capital markets. They are closely watched with a mixture of fascination and fear for their ability to set off financial market landslides.

Mr. Soros is credited with almost single-handedly igniting this year's rally in gold prices in April by letting it be known he had purchased a $400 million interest in Newmont Mining of Colorado, a company owned by Sir James Goldsmith, another global markets high-roller.

Earlier that month, the price of an ounce of gold had hit a seven-year low at $326 an ounce. It recently topped $400 an ounce.

These players don't usually tip their hands. But Mr. Soros in the past few years has cultivated the role of a financial markets statesman, in part because of his deep involvement in Eastern Europe.

His Soros Foundation has spent many millions in the ex-East Bloc to help usher in democracy and foster open societies. Late last year, he pledged $50 million for humanitarian aid in Bosnia, and Mr. Soros lobbied President Clinton personally for U.S. intervention there.

Some question how much influence he actually wields.

"Soros speaks through the microphone of hundreds of millions of HTC dollars," said James Grant, editor of a Wall Street newsletter called Grant's Interest Rate Observer and a financial historian.

"It's not unusual that a very successful person should have a vital role to play in monetary affairs," Mr. Grant said.

Mr. Soros himself would be the first to admit he is not infallible. In 1981, Institutional Investor magazine called him "the world's greatest money manager." That year his Quantum Fund fell by 23 percent.

In 1987, Mr. Soros predicted a Japanese stock market crash -- and lost a cool $800 million in the Wall Street he didn't see coming. This June, Mr. Soros moved the world currency market when he published a prominently displayed letter in the Times of London newspaper which argued that the German mark was highly vulnerable because of all that nation's economic problems.

He also argued that European monetary union was essential as a step towards fuller political unification -- the need for which, he said, "the debacle in Yugoslavia has clearly demonstrated."

More recently, during the late-July European currency crisis, Mr. Soros told a Paris newspaper he wasn't speculating against the French franc, under pressure like the British pound was in 1992, "because I do not want to be accused of destroying the European Monetary System."

That gave the French franc a brief respite from attack -- though it crumbled a week later when a worse currency crisis flared. Mr. Soros later declared his non-speculation pledge void after the German central bank refused to cut its interest rates to relieve the French franc.

The incident, however, demonstrated his considerable influence not only on financial markets but in matters of monetary policy -- though Mr. Soros hastens to add that he remains, at bottom, a speculator.

"I try to avoid speculative activities that could prove wantonly destructive," Mr. Soros said in June, "but I see no reason to abstain from moves that would happen without my participation.

"Of course," he added with a wry twist, "in making such judgements, I am no more infallible than the central banks."

Brendan Murphy, a former UPI financial writer, is a consulting editor for International Reports, a global capital markets weekly.

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