Soros: The (Only) Solution To The Euro Crisis

“The financial markets are testing the ECB and want to find out what it is allowed to do. The central bank must stop the bond run at all costs because it is endangering the stability of the single currency. The best way to do it in the near term is to impose a ceiling on the yield of sovereign bonds issued by governments that follow responsible fiscal policies and are not subject to adjustment programs.

Normally central banks fix only short-term interest rates but these are not normal times. Government bonds that were considered risk-free when financial institutions acquired them, and are still treated as such by the regulators, have turned into the riskiest of assets.

Italian and Spanish bonds are viewed as too risky to buy with a yield of seven percent because they are regarded as toxic, and the yield could just as easily rise to 10 percent. Yet the same bonds would be attractive long-term investments in the current deflationary environment, at say four percent, as long as the excessive risk is removed by imposing a five percent ceiling on interest rates.

The interest rate ceiling should be regarded as an emergency measure. In the medium term it could encourage politicians to abandon fiscal discipline." - George Soros