£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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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