“The Man Who Broke the Bank of England” George Soros “The Man Who Broke the Bank of England” Presented By: Vaibhav Ajmera Patricia Lopez Sabrina Madhani Shabeena Meghani Nisha Patel

Introduction September 16, 1992 The man who made it happen British pound forced out of ERM by currency speculators and British ego severely bruised The man who made it happen George Soros, the world’s biggest currency speculator All in a day’s work Took home 1 billion US dollars in profit

Setting the Scene

Exchange Rate Mechanism Founded in 1979 among 8 European countries Move towards one currency Adjustable peg system to the German mark Largest member of the ERM Bundesbank—Germany’s central bank Ensured stability and flexibility Fluctuation band around central exchange rates

Germany-A Brief History 1989—Fall of the Berlin Wall, Reunification Focus on internal political & economic problems 1991—Government Spending Skyrockets Causes of Spending Consequences: Central Bank prints MORE MONEY Inflation Stimulates increase in interest rates

England-a Brief History Joined ERM in 1990 Benefit from one currency peg “Recession in progress” High unemployment, high interest rates Response to Germany’s increasing interest rate Two options: increase interest rates or devalue Instead, try to defend pound by building reserves

International Investors Split Most bet on bank of England Vs. Select few predicted inevitable devaluation

George Soros: Strategy Bet $10 billion Short pounds and long in DMs Borrowed pounds from British banks Sold pounds and bought DMs Flooded Forex market with pounds

England’s Defense Goal: avoid excess supply of pounds to prevent devaluation Strategy: use accumulated reserves to buy pounds off the market -Spent approx. 15 billion pounds

Simple Economics Soros WINS!! Soros: supply side Bank of England: demand side Tug of war Supply curve shifted to right Forces pound devaluation Soros WINS!!

Britain is forced out of ERM Black Wednesday September 16, 1992 Britain is forced out of ERM

Aftermath… Post devaluation: -Soros sells DMs -Buys back pounds for cheaper Profit of $ 1 billion overnight!! Foresight of stock market phenomenon

England in Shambles? Bruised ego Economic recovery Bad press for Soros Steady inflation Interest rates found “natural level” Improvement in BOP

Can History Repeat Itself? Most currencies get attacked soon after it’s clear they’re vulnerable Self-fulfilled crisis (one time event) Then vs. Now Interconnection of economies

Lessons Learned… Comes down to the fundamental concepts of economics Governments MUST remain true to the markets How? Implement policies that conform with strict economic orthodoxy Britain tried to have their cake and eat it too