Soros Says World Economy Facing 'Vicious' Deflationary Cycle

http://online.wsj.com/article/SB10001424052970204257504577150403662707094.

BY RUMMAN AHMED AND SUDEEP JAIN

BANGALORE – George Soros, the billionaire U.S. investor, said Monday the global economy is facing a "vicious" deflationary cycle as members of the euro zone cut back sharply on spending to bring their budget deficits under control, crimping demand and squeezing prices.

The euro zone faces a period of "draconian austerity" as a result of the measures it has employed to deal with its sovereign-debt problems, even if it survives the current crisis. Mr. Soros said in a speech at a university founded by billionaire Indian businessman Azim Premji.

While the euro zone now has a central fiscal authority in the form of the European Financial Stability Facility, its terms will be dominated by creditor nations such as Germany, Mr. Soros said.

"Within the euro system, its the creditors who are going to call the shorts... Germany is dictating the rules that are going to be followed by the European treasury," he said.

The euro zone crisis stems from the use of sovereign credit to substitute failing commercial credit in the wake of the 2008 financial troubles, said the Hungary-born investor who attacted global attention for his 1992 bet against the British pound that earned $ 1 billion for his Quantum hedge fund.

"The excessive use of sovereign credit has now brought sovereign credit into question," he added.

The current crisis is even more serious than the global financial meltdown of 2008, Mr. Soros said, warning that any collapse of European banks would have global consequences.

Emerging economies would be less affected by the problems in Europe than developed countries, he added.