16th September,1992 was a normal day for people all over the world except for Britain.It is said that country never faced such a financial crisis in the past.The day is also be remembered as "The Man who broke Bank of England" and that man was George Soros who made profits to the tune of 1 billion $.George Soros is a Hungarian born American hedge fund manager who first ran Quantum fund alongwith Jim Rogers and then Soros fund.
The seeds of this crisis were sown in 1990's.The event actually began in 1979 when European nations were joining ERM (Eurpoean Exchange Rate Mechanism).But Britain refused to join it at that point in time which according to me was correct because pegging sooner or later leads to the negative results.But the Britain cabinet ministers had different views.This was regarded as a controversial decision as the Chancellor of the Exchequer, Geoffrey Howe,was Pro-European.His successor Nigel Lawson was a believer in fixed exchange rate admired the low inflationary record of Germany.From 1987 to 1988,Treasury followed a semi-official policy of shadowing the Deutsche Mark.There was a clash between the Cabinet ministers on the matter of this half baked policy.
Finally on 4th October,1990 Margaret Thatcher agreed to join ERM against her will.But it is said that it was Margaret Thatcher who put Britain on the path of Black Wednesday.It is so because although she detested the idea initially but finally she was persuaded and she took the decision that Britain should be a part of ERM. British pound was locked against German Deutsche Mark (1 GBP = 2.95 DM).Pound could only fluctuate not more than 6%.The reason why only German's currency was selected because Germany attained prosperity in the past and Britain also wanted to enjoy that prosperity.Pound's value would remain stable and for that Britain had to match Germany's interest rate.Whatever Germany did to their interest rates, Britain also had to do the same.Britain wanted both low inflation and German style prosperity.But this decision was taken by Britain without negotiations with Europeans and they felt that the value of pound was on the higher side.On top of that,Britain was in recession at that point in time.
The time at which Britain entered ERM was unfavourable because the economies of Britain and Germany were in different shape.Similar medicine could not be given to both the economies to cure their problems.Interest rates were already high in Britain,the economy was in recession,it was difficult time for people to pay mortgages and houses were selling at the prices less than they actually bought.So it was necessary to cut the interest rates in Britain.But Britain cannot take that decision on its own because it was locked in ERM with Germany.
Things actually got worst because Germany's economy started facing inflation and they had to increase the interest rates.Britain tried to avoid it considering its state of economy and there was one way left and that is to devalue its currency.On 4th September,1992 Britain Chancellor tried to persuade Bundesbank's officials to cut interest rates.But they refused because that was the need of the hour for Germany.On 11th October,1992 Italy was on the brink of collapse of its entire economy .Germany now decided to cut its interest rate if Italy,Britain devalue their currencies to which Britain refused.
Although Britain initially refused to devalue its currency but even Bundesbank official while giving interview said that Britain had no other option.George Soros and other pension funds took cue from this statement.Bank of England anyhow had to absorb the pounds sold by George Soros and other pension funds but it could not. Bank of England began placing buying orders to the amount of 300 million pounds twice before 8:30 AM but Soros fund was dumping pounds much faster.Britain increased interest rates from 10 to 12 because they wanted to defend the value of pounds.Markets took it otherwise,considered it as a weakness.Even they increased the rates from 12 to 15%.There was only a small rally in pound in comparison to the hike in interest rates.They tried to persuade Bundesbank but they refused.Britain had no other option but to withdraw from ERM.
In 1997, UK Treasury estimated the cost of Black Wednesday to the tune of 3.4 billion pounds.George Soros took short position in the British pound to the tune of 5 billion pounds.
Source : BBC Documentary
The seeds of this crisis were sown in 1990's.The event actually began in 1979 when European nations were joining ERM (Eurpoean Exchange Rate Mechanism).But Britain refused to join it at that point in time which according to me was correct because pegging sooner or later leads to the negative results.But the Britain cabinet ministers had different views.This was regarded as a controversial decision as the Chancellor of the Exchequer, Geoffrey Howe,was Pro-European.His successor Nigel Lawson was a believer in fixed exchange rate admired the low inflationary record of Germany.From 1987 to 1988,Treasury followed a semi-official policy of shadowing the Deutsche Mark.There was a clash between the Cabinet ministers on the matter of this half baked policy.
Finally on 4th October,1990 Margaret Thatcher agreed to join ERM against her will.But it is said that it was Margaret Thatcher who put Britain on the path of Black Wednesday.It is so because although she detested the idea initially but finally she was persuaded and she took the decision that Britain should be a part of ERM. British pound was locked against German Deutsche Mark (1 GBP = 2.95 DM).Pound could only fluctuate not more than 6%.The reason why only German's currency was selected because Germany attained prosperity in the past and Britain also wanted to enjoy that prosperity.Pound's value would remain stable and for that Britain had to match Germany's interest rate.Whatever Germany did to their interest rates, Britain also had to do the same.Britain wanted both low inflation and German style prosperity.But this decision was taken by Britain without negotiations with Europeans and they felt that the value of pound was on the higher side.On top of that,Britain was in recession at that point in time.
The time at which Britain entered ERM was unfavourable because the economies of Britain and Germany were in different shape.Similar medicine could not be given to both the economies to cure their problems.Interest rates were already high in Britain,the economy was in recession,it was difficult time for people to pay mortgages and houses were selling at the prices less than they actually bought.So it was necessary to cut the interest rates in Britain.But Britain cannot take that decision on its own because it was locked in ERM with Germany.
Things actually got worst because Germany's economy started facing inflation and they had to increase the interest rates.Britain tried to avoid it considering its state of economy and there was one way left and that is to devalue its currency.On 4th September,1992 Britain Chancellor tried to persuade Bundesbank's officials to cut interest rates.But they refused because that was the need of the hour for Germany.On 11th October,1992 Italy was on the brink of collapse of its entire economy .Germany now decided to cut its interest rate if Italy,Britain devalue their currencies to which Britain refused.
Although Britain initially refused to devalue its currency but even Bundesbank official while giving interview said that Britain had no other option.George Soros and other pension funds took cue from this statement.Bank of England anyhow had to absorb the pounds sold by George Soros and other pension funds but it could not. Bank of England began placing buying orders to the amount of 300 million pounds twice before 8:30 AM but Soros fund was dumping pounds much faster.Britain increased interest rates from 10 to 12 because they wanted to defend the value of pounds.Markets took it otherwise,considered it as a weakness.Even they increased the rates from 12 to 15%.There was only a small rally in pound in comparison to the hike in interest rates.They tried to persuade Bundesbank but they refused.Britain had no other option but to withdraw from ERM.
In 1997, UK Treasury estimated the cost of Black Wednesday to the tune of 3.4 billion pounds.George Soros took short position in the British pound to the tune of 5 billion pounds.
Source : BBC Documentary
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