Billionaire investor George Soros believes the European Union should issue perpetual bonds to pay for the efforts to deal with the coronavirus pandemic. He made the suggestion in an interview with the Dutch newspaper De Telegraaf today. He also published the interview on his own website.
In the interview, he warned that the damage caused by the coronavirus on the eurozone economy will last "longer than most people think."
ValueWalk's Raul Panganiban interviews William Burckart, The Investment Integration Project’s President and COO, and discuss his recent book that he co-authored, “21st Century Investing: Redirecting Financial Strategies to Drive System Change”. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors.
EU should issue perpetual bonds: George Soros
Soros said the European Union can finance its recovery efforts for the COVID-19 pandemic while also maintaining its AAA rating by issuing perpetual bonds. He said the bonds could also help the EU deal with climate change and offer an alternative to raising the bloc's budget while also providing relief funds to member states that have been the hardest hit by the crisis.
The perpetual bonds suggested by George Soros are debt that would never be paid back. Only interest on the debt would be paid; the principal would never be paid back. This type of bond is also known as a consol.
Soros said a €1 trillion bond would cost €5 billion per year, which assumes an interest rate of 0.5%. He explained that the bonds wouldn't have to all be sold at once. The EU could issue them in tranches, and he believes long-term investors like life insurance companies would be interested in purchasing them. Under his plan, the only obligation is that the interest must be paid every year, which is negligible.
Perpetual bonds versus corona bonds
There's been debate in the EU over whether officials should issue corona bonds to fund the relief efforts from COVID-19. George Soros said his suggestion of perpetual bonds has been confused with corona bonds, which has "poisoned the debate" because the two "have nothing to do with each other."
He noted that corona bonds have been "decisively rejected" for good reason because they require "a degree of mutualization that is simply not acceptable." His suggestion of perpetual bonds requires much less mutualization in the form of the annual interest. Paying €5 billion per year would secure €1 trillion, which he described as "an amazingly low cost/benefit ratio of 1:200."
George Soros did note that there are some major challenges to issuing perpetual bonds. In order to issue them, the EU will have to maintain its AAA rating, or the bonds would become unsaleable. That requires the EU to levy taxes to cover the cost of servicing the bonds, and each country has its own laws about imposing taxes.
He did suggest a solution, however. Soros said the taxes only have to be authorized, but they don't need to be implemented. He said authorization could take weeks instead of years. After the taxes are authorized, the EU could issue the perpetual bonds.
What if we don't? Soros warns:
Exceptional circumstances require exceptional measures. Perpetual bonds or consols are such a measure. They should not even be considered in normal times. But if the EU is unable to consider it now, it may not be able to survive the challenges it currently confronts. This is not a theoretical possibility; it may be the tragic reality.
The coronavirus and climate change are threatening not only people’s lives but the survival of our civilization.
The European Union is particularly vulnerable because it is based on the rule of law and the wheels of justice turn proverbially slowly. By contrast the coronavirus moves very fast and in unpredictable ways.