Soros `meltdown' warning sparks turmoil in markets

Click to follow
The Independent Online
GEORGE SOROS, the currency speculator who broke the Bank of England, caused mayhem on the world's financial markets yesterday after warning of a "meltdown" in Russia and calling for a devaluation of the rouble.

Russia's "Black Thursday", as it was dubbed by state-owned radio, caused severe jitters in other markets, with shares down sharply in both London and Germany and the German mark down by four pfennings against sterling at one point.

Trading on the Moscow stock market was suspended for 35 minutes after shares crashed by 12 per cent in the wake of Mr Soros's remarks, made in a letter to the Financial Times.

Mr Soros, a Hungarian-born speculator and philanthropist, is reputed to have made $1bn betting against sterling when it was forced out of the Exchange Rate Mechanism in 1992.

Since then his record has been patchy. Mr Soros got his fingers burnt badly during the Far East economic crash and then misjudged spectacularly earlier this year by taking out an $8bn bet against the pound.

But yesterday he was bang on target, after urging the Russian authorities to devalue the rouble by between 15 and 25 per cent. In his letter he said: "The meltdown in Russian financial markets has reached the terminal phase. ... The best solution would be to introduce a currency board [pegging the currency to the dollar or the euro] after a modest devaluation of 15 to 25 per cent."

The reaction in the already shaky Russian markets was dramatic. The central bank was forced to impose limits on rouble trading after heavy selling of the currency, and yields on government bonds rocketed on fears of a devaluation.

The Russian authorities rebuffed all suggestions of a devaluation. The prime minister, Sergei Kirienko, described the day's events as "in the sphere of psychology and not real economics", while other ministers rallied around the battered stock market and currency.

Mikhail Zadornov, finance minister, said: "If we thought that a devaluation was inevitable, we would not be following our current policy. But it is avoidable."

However, Gennady Zyuganov, the Communist leader, warned: "An absolutely urgent situation had arisen. If there is a devaluation of the rouble, a collapse of the banks and the impoverishment of the people will follow."

In Britain, the FTSE closed down 62.7 points at 5399.5, having been down by more than 100 points during morning trading. Germany was one of the worst-hit European bourses, due to worries about the exposure of German banks to Russia. In Frankfurt, the DAX ended the day slightly down.

In the US, the Dow fell 44 to 8509 in late-morning trading, erasing an earlier 50-point gain.

Rumours of a Russian devaluation had earlier hit the markets in Hong Kong, where the Hang Seng Index closed down 199 points, at its lowest level since April 1993.

Experts were agreed yesterday that a devaluation would provide short- term relief to Russian woes. But it would also bring a new set of problems, since many Russian banks have commitments to buy dollars at an agreed point in the future at a specified dollar/rouble exchange rate.

Devaluation would also damage the confidence of both residents and foreign investors. A sharp fall in the rouble would render the savings of many Russians almost worthless in foreign currency terms. This so-called "wealth effect" could precipitate a political crisis.