EUROPE - Hedge fund guru George Soros has argued the European Financial Stability Facility (EFSF) must take control of Europe's banking system if it is to solve the sovereign debt crisis without causing another banking collapse.
Writing in the Social Europe Journal, Soros says allowing the EFSF to take responsibility for the banking sector would restore confidence in the eurozone.
"The European Financial Stability Facility must serve to rescue the banking system as well as member states. This would allow sovereign debt to be restructured without precipitating a banking crisis.
"Despite this added task, the size of the rescue package could remain the same, because any amount used for recapitalising or liquidating banks would reduce the amount needed by governments," he says.
Soros believes the bulk of peripheral sovereign debt should be converted into Eurobonds, which would level the playing field between different countries in terms of their borrowing costs.
"The risk premium on the borrowing costs of countries that abide by the rules will have to be removed, and this could be done by creating eurobonds," says Soros.
"Individual countries would then have to issue their own bonds with collective-action clauses, paying the risk premium only on amounts that exceed the public-debt limit (60% of GDP) set by the Maastricht criteria.
"Bringing the banking system under European supervision, rather than leaving it in the hands of national authorities, would be a fundamental improvement that would help restore confidence.
"The European Union will suffer something worse than a lost decade as it will endure a chronic divergence in which the surplus countries forge ahead and the deficit countries are dragged down by their accumulated debt burden."
Meanwhile, Soros hit out at Germany for the part it has played in the sovereign debt crisis.
The veteran hedge fund manager says Germany has only been bailing out heavily indebted countries to protect its own banking system.
"Germany blames the crisis on the countries that have lost competitiveness and run up their debts," says Soros.
"The country also places all the burden of adjustment on debtor countries but ignores its major share of responsibility for the currency and banking crises, if not for the sovereign debt crisis."
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