Billionaire investor George Soros says that the global financial system is on the brink of collapse.
Developed countries are falling into a “deflationary debt trap,” in which consumer spending falls, products become more expensive, tax revenues drop, and sovereign debt grows, Soros said last week, according to the Wall Street Journal. As a result, he said, the global financial system is in a “self-reinforcing process of disintegration.”
“The consequences could be quite disastrous,” Soros, who was born in Hungary, said at the tenth anniversary of the International Senior Lawyers Project.
Concern is mounting that the eurozone may break up because of market pressure on European sovereign debt, which could plunge Europe into a depression and the world into a recession. Observers are already worried that Europe could suffer a recession and subsequent slow growth for several years even if it averts a eurozone breakup, since products would remain expensive in the euro, making consumers more hesitant to buy them and forcing governments to curtail budgets even more as consumer spending falls.
The markets have forced pressure on the eurozone because of these fears. Borrowing costs for Italy and Spain recently hit record highs, which economists say are unsustainable over the long term. Either of these countries would be forced to default on their debt if not enough investors are willing to buy their new sovereign debt at bond auctions.
If Italy or Spain defaults on their sovereign debt and leaves the eurozone, it would probably break up. Depositors likely would pull their investments from banks, large European banks would fail, borrowing costs for other countries would become unsustainable, and other countries would leave the euro. Such an outcome would depress lending and consumer spending and plunge Europe into a deep recession.
European leaders will meet for a summit on Thursday and Friday to try to reach an agreement to stave off a breakup of the eurozone — a deal they haven’t been able to come to for two years.
