Finance

1992: George Soros blows up the Bank of England

In 1992, the euro didn’t exist yet, but there was the European Monetary System (EMS), which stabilized the exchange rate of the various European currencies through the ECU (European Currency Unit).

Every day the central banks of the EMS countries intervened on the foreign exchange market to limit the fluctuation margins to a maximum threshold of 2.25%. The various EMS currencies (franc, mark, pound, etc.) were therefore linked together with quasi-fixed rates (Giavazzi, F et al., 1988).

The Monetary System had the same weaknesses as the euro at present. The EMS countries were not all in the same economic situation. England, for example, was experiencing an economic crisis with an inflation rate of almost 8% and the pound sterling because it was far too high for the country’s economy. England did not have the possibility to devalue sterling because it was linked to the other currencies of the European Monetary System by its exchange rate.

George Soros’ Attack on Sterling

Seeing that England’s situation was untenable, George Soros believed that the only possible solution for England was to leave the European Monetary System, which would lead to a fall in the pound sterling and the necessary devaluation of the English economy. George Soros invested heavily through his investment fund on the impending fall of the pound sterling.

The Global Macro hedge fund created by Georges Soros, Quantum makes a loan of 15 billion dollars in exchange for a guarantee of 1 billion, which makes a leverage effect of 15. It also succeeds in convincing other hedge funds and investment banks (Bank of America, JP Morgan etc.) that the pound will collapse and encourages them to sell (Fung, W. & Hsieh. 2000)

£10 Billion

On 16 September 1992, Georges Soros took short positions on the pound sterling reaching £10 billion. Georges Soros’ sales caused (by their size) a significant fall in the pound sterling.

Initially the Bank of England used its liquidity to limit the fall of sterling against the franc and the German mark by making purchases on the foreign exchange market. Despite this intervention the pound sterling lost more than 15% in a few hours. The Bank of England could no longer withstand the fall of the pound on the foreign exchange market and had to resign itself to exit the European Monetary System the same evening, resulting in a sharp fall of the pound sterling and a capital gain of 1 billion for Georges Soros. The day on 16 September 1992 when Georges Soros sank the Bank of England and the pound was “Black Wednesday” (Slater, R, 2009).

References

Giavazzi, F., Micossi, S. and Miller, M. eds., 1988. The European monetary system. Cambridge University Press.

Fung, W. and Hsieh, D.A., 2000. Measuring the market impact of hedge funds. Journal of Empirical Finance7(1), pp.1-36.

Slater, R., 2009. Soros: The Life, Ideas, and Impact of the World’s Most Influential Investor. McGraw-Hill Professional.

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