The international financial crisis - International Solutions - interview with hedge fund manager George Soros - Interview

Challenge, March-April, 1999

Interview with George Soros

George Soros is the best known hedge-fund manager in the world. He has bet aggressively against the world's leading central banks and made billions of dollars in the process. But he is also a leading critic of the very financial markets in which he operates and he discusses what he thinks are the necessary solutions to the current crisis.

Q The collapse of the Thai currency, the baht, in July 1997 was the immediate cause of the global financial crisis. I know that you had been selling the baht many months before the decline. Why?

A. The trouble could be seen six to nine months before the decline actually occurred. Thailand's trade deficit was very high, and it had to be offset by an enormous inflow of capital. The amounts of money required were expanding rapidly. We could anticipate that. But what we couldn't anticipate was the magnitude of the consequences.

Q. Was it that when the link of the baht to the dollar was broken, international investors fled?

A. It was not so much that the speculators were attacking the Thai currency at the outset. There were a many private loans to Thai borrowers in foreign currencies. A lot of people in Thailand had borrowed in foreign currencies, converted into the Thai currency, and invested the money or lent it out for real estate development and other investments. Investors assumed that the relationship to the dollar would be stable. But suddenly, when the baht collapsed, those dollar obligations became enormous and debtors had to run for cover. They sold baht and bought dollars. A company like Siam Cement, the best company in Thailand, took a currency loss that wiped out not only all its earnings but a large part of its equity as well. So, naturally, since this happened to many companies, the stocks also fell. It was a combination currency; stock market, and banking crisis. Each element reinforced the other. The debtors depressed the local currency, the fall caused losses, which then reinforced the decline in the stock market. The banks were now loaded down with bad debts.

Q. How did the fall of the baht affect the other nations of the region?

A. Once the link with the dollar was broken, the Indonesian and Malaysian currencies fell as well. The decline was contagious and spread to Taiwan, the Philippines, and Singapore. It built up to a speculative attack on the Hong Kong dollar. Korea was temporarily insulated because it had some form of capital controls. But the Korean and Japanese banks were heavily involved in Indonesia. They could not renew the loans they had made there, and this eventually caused the problems in Korea.

Q Many critics now say that excessive lending by the major Japanese, American, and European banks was the principal problem. Obviously, local business could not have borrowed so freely unless the money was readily available at attractively low interest rates. Do you agree?

A. That was certainly a common element. I would hesitate to say it was the sole cause. There were some differences among these nations. For example, Malaysia's borrowing was mostly internal, not international. Indonesia was not really overindebted. Their trouble was that they had borrowed from the Korean and Japanese banks, which now wanted to get their money back because of their own troubles and troubles elsewhere.

I am more familiar with the Korean situation than with some of the others. The chaebol, the big Korean conglomerates, had debt-to-equity ratios of 4 to 1. This was wholly unacceptable by international standards. And they were operating with very low profit margins. Their earnings totaled only 1.3 times their debt service, mostly interest costs. Once problems started, the banks had good reason to worry whether these companies could repay their debt. So it was the interconnections among the various countries - through international markets and through the banks - that turned it into a widespread crisis.

Q One of the long-standing controversies involving you and other hedge fund investors is that you sell an enormous amount of the currencies when you think they are high. But this puts on pressure for the currencies to be devalued, forcing the nations to spend a lot of their reserves to buy their currency in an attempt to bolster it. What do you make of the claim that the baht would have been able to hold its value if you and other investors had not sold short in such great volume?

A. I don't think it is right. This is something that had to happen, irrespective of whether we took a position. As a matter of fact, though we were in the market early; we were not selling the baht for six months before the collapse. There may have been others who were attacking the currency in July, but we were not. Actually; we were buyers of these currencies during the decline because we didn't expect them to fall as far as they did. For instance, when the Indonesian rupiah fell from 2,400 to the dollar to about 4,000, we thought it was too low. So we bought it. It immediately proceeded to fall to 16,000 to the dollar. That was not a pleasant experience for us. But at the time we were actually a balancing factor rather than a reinforcing one. It shows that speculators can lose money.