Soros' Brexit Intervention: A Warning Or A Bet?

A geopolitical event isn't a geopolitical event until George Soros has opined on it - and so, with an air of inevitability, the billionaire fund manager and philanthropist has waded into the debate on the EU referendum.

Mr Soros, famed as "the man who broke the Bank of England" in 1992, has written an article in The Guardian newspaper in which he warns that a vote for Brexit would lead to a devaluation in sterling far greater than the one that enriched him and his investors to the tune of almost $1bn back in September 1992.

On that occasion, the pound fell by more than 15%, but Mr Soros feels a Brexit vote would send sterling down by at least that amount and possibly by more than 20%. Such a decline would take the pound from its current level of around $1.46 to below $1.15.

And he said there would be plenty of speculators - like him in 1992 - waiting to cash in on the moves.

He wrote: "Today, there are speculative forces in the markets much bigger and more powerful. And they will be eager to exploit any miscalculations by the British government or British voters.

"Brexit would make some people very rich - but most voters considerably poorer."

But are Mr Soros' views really worth heeding? Well, the UK Treasury and the Bank of England will need no reminding about what he can do.

In October 1990, some six weeks before she was toppled by her own party, Margaret Thatcher took Britain into the Exchange Rate Mechanism (ERM) - a system that sought to peg the value of a number of European currencies to that of the German deutschmark.

The aim of the scheme was to bring about convergence between European currencies ahead of their eventual coming-together in the European Currency Unit which, in time, became the euro.

Mrs Thatcher had never been especially keen on sterling joining the ERM and the rate at which sterling joined the scheme, at 2.95 deutschmarks to the pound, was seen as hugely overvalued.

Mr Soros began selling the pound in anticipation of what he saw as an inevitable devaluation.

As other speculators joined in, matters came to a head on 16 September 1992, when the Bank of England was forced to spend billions defending the pound, buying it against other foreign currencies, with the aim of preventing it from falling too far away from that crucial DM2.95 level and below DM2.778 - the bottom of its permitted trading range against the deutschmark.

The then chancellor Norman Lamont, who in those days set the cost of borrowing, raised interest rates from 10% to 12% and then, later, to 15% in a desperate attempt to prop up the pound. All to no avail.

Later that day, standing on the steps of the Treasury and flanked by his then special adviser - one David Cameron - Mr Lamont announced that Britain was suspending its membership of the ERM, allowing him to bring interest rates back down to 12%.

They were further reduced to 10% the following day. By then, 16 September was being called Black Wednesday, while the episode destroyed the long-held record of the Conservatives for economic competence and gave Labour, after years of opposition, a route back into government.

Mr Soros, who had sold something like $10bn worth of pounds, was able to close his position at a cost of just over $9bn - the $1bn difference being the profit for him and his investors.

The saga catapulted Mr Soros to fame and, ever since, he has used his fame and fortune to establish himself both as a generous philanthropist and campaigner for human rights as well as something of a financial soothsayer.

Yet Mr Soros, who is estimated to have a personal fortune of around $24bn, has not always got it right.

During the first six months of 2011, his Quantum Fund lost 6%. Not long afterwards, he announced he was giving up managing other people's money, although he cited more onerous regulation of hedge funds - rather than his losses that year - as the prime reason for doing so.

And, even before he became known as "the man who broke the Bank of England", Mr Soros had become well-known for winning - and losing - vast sums of money.

For example, his fund lost $800m during the 1987 global stock market crash known as Black Monday.

Just three weeks before the crash, when many market commentators were saying Wall Street was heading for a correction, Mr Soros had told Fortune magazine: "Just because the market is overvalued does not mean it is not sustainable."

He also suffered a $600m loss in February 1994 after mistakenly betting that the Japanese yen would continue to fall against the US dollar.

And, in September 1998, Mr Soros admitted that his fund had lost $2bn that year wrongly betting on increases in the Russian stock market and rouble.

In early January 2000, in just three days, he also lost $600m following a sell-off in technology stocks. By the middle of that year the fund was down some $4bn, reflecting big falls in the Nasdaq (NasdaqGS: NDAQ - news) , with Mr Soros’s losses magnified because he had borrowed to invest in tech stocks.

Mr Soros has also attracted the attention of the courts on various occasions for his activities. In 1991, for example, his fund was sued in the New York courts for conspiring with a trader at the investment bank Salomon Brothers to corner the market in certain government securities.

In France, he was convicted in 2002 for insider trading, for which he was fined €2.2m. The billionaire has always insisted that he had done nothing wrong but, after numerous appeals, the conviction was upheld by the European Court of Human Rights in 2012.

So, while Mr Soros is undoubtedly an investment genius, there have been times when he has got his bets wrong.

And, of course, as Michael Gove of the Leave campaign has pointed out, Mr Soros famously said, in June 2002: "Britain needs to join the euro because not joining it would disqualify Britain from attracting capital investment."

That call, of course, was utterly wrong.

There is another reason why some caution needs to be applied to Mr Soros' remarks today. It (Other OTC: ITGL - news) would be helpful if, in writing his article for The Guardian, Mr Soros had disclosed what positions he may or may not be running on sterling or sterling-denominated assets.

Past experience suggests that, when high-profile traders like Mr Soros speak out on issues like the referendum, their comments can often become a self-fulfilling prophesy. A big fall in the pound may be exactly what he is hoping will happen.