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£BREAKDOWN OF THE POUND,GEORGE SOROS,AND GBP ERM WITHDRAWAL
Maxim Ogienko – March 18, 2010 – BUS 487G
ERM – A Semi-Pegged System
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Octob
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Novem
ber
Decem
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Janu
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Mar
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1.3301.3351.3401.3451.3501.3551.3601.3651.3701.3751.380 Banks intervene
Exchange rate vs. ECU
ECU Components
BEF; 8.18%
DKK; 2.65%ESP; 4.14%
DEM; 31.96%
FRF; 20.32%
GBP; 12.45%
GRD; 0.44%
IEP; 1.09%ITL; 7.84%
LUF; 0.32%NLG; 9.98% PTE; 0.70%
Precursors of the ERM CrisisWest East
DM 350MM
1DM = 1.8M
• – German spending increases– German inflation rates increase– British inflation levels still three times
higher than that of Germany
• US Dollar rapidly depreciates – many UK exports priced in USD
• UK and Italy have double deficits• Interest rates at 15%, “Lawson
Boom” about to bust
George Soros
GBP/DEM X-Rate, 1992
September 16,1992Black Wednesday
2.776
3.116
Traders’ Assumptions
• Currency must revert to ERM boundaries
• Britain is reluctant to raise interest rates
• Interest rates UP – currency rates UP• Currency rates UP – equity prices
DOWN• Currency rates UP – bond prices UP
Soros’ Positions
• SHORT British Currency – 7bn• SHORT Italian Currency• LONG British Equities – 500m• LONG German Currency – 6bn• LONG German and French Bonds• SHORT German and French Equities
UK Treasury Response
• Raising interest rates to 10% - 12% - 15%
• Spent £27B of foreign reserves in propping up (buying) the pound
£3.4 BILLIONEstimated total cost of Black Wednesday [1997]
£800 MILLIONEstimated Black Wednesday trading losses [1997]
Used$26.9b
nLeft$51.9b
n
British Reserves
Britain Spain Italy
-30%-25%-20%-15%-10%
-5%0%
Currency Devaluation by Country
France Italy Germany Eurozone UK0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
Annualized GDP Growth, 1992-2005
Aftermath
• Conservative Party blamed for crisis; loses 1997 election, Prime Minister John Major succeeded by Tony Blair
• UK leaves ERM• Italy and Spain widen ERM bands• ECU replaced by euro in 1998• ERM-II established in 1999