The Trade of the

Century:
When George Soros
Broke the British Pound

Group 03
Riya Malvankar – 07
Vidhi Mehta – 17
Rashi Mehta – 44
Nibin Varghese – 98
Puja Shah – 106
Mahima Kabra – 111
George Soros
George Soros,  is a Hungarian-American billionaire investor and
philanthropist.

He had a net worth of $8.3 billion. He is ranked the 56th

richest person in America by Forbes and in the #162 spot
globally.

He began his business career by taking various jobs at

merchant before starting his first hedge fund, Double
Eagle, in 1969.

Soros is known as "The Man Who Broke the Bank of England",

which turned him into a billionaire overnight in 1992.

He is supporter of progressive and liberal political causes, having

donated more than $32 billion.
Hedge Funds & Currency Pegging

A hedge fund is a pool of money that takes

both short and long positions, buys and sells
products to generate returns at reduced risk

The aim of a hedge fund is to provide the

highest investment returns possible as
quickly as possible

Hedge funds are rarely accessible to the

majority of investors & are less regulated

A policy in which a national government sets

a specific fixed exchange rate for its
currency with a foreign currency or a basket
of currencies
Background to British economy
Inflation had
fallen back below
Early 5% but was still Late
1970 Pound traded 1980s too high and the 1980s
under a fixed pound remained
exchange rate volatile, falling
then government from almost
decided to float $2.50
it

UK economy Government Government

had been continued to started to peg
underpinned by struggle to get a the currency to
strong growth grip on inflation that of
and moderate and the pound Germany’s.
inflation during 1972 1985 This was the
the post-war precursor to
period joining the ERM
European Exchange Rate Mechanism (ERM)
Why ERM ?
After World War II, European countries wanted to integrate their economies more
tightly with each other, foster peace, prevent the outbreak of another catastrophic
war and also to compete with the US.

ERM Setup
ERM was set up in March of 1979 to reduce exchange rate variability
and stabilize monetary policy across Europe before introducing a
common currency that would eventually be known as the euro.

Member nations
Eurozone was established with its first 11 member states on 1 January
1999. Member nations agreed to maintain their currency rates within plus
or minus 2.25% of a central point.  

ERM Mechanism
Under the ERM, the currencies of member nations were required to fluctuate within
a specific range relative to each other. member nations with strong currencies
were supposed to sell them and also purchase weaker currencies in order to help
maintain suitable exchange rates
Current status of ERM II

Exchange rates bound

The European exchange to a 15% range, up or
rate mechanism down, against the
dissolved by the end of central rate
the decade, but not  It also helped non-euro-
before a successor was area countries prepare
installed. The Exchange to enter the euro area
Rate Mechanism II
(ERM II) was formed in
January 1999

As of 2020, three
currencies participate
in ERM II: the Danish
Some current and krone, the Croatian
former members of Kuna and the
the ERM II include Bulgarian lev.
Greece, Denmark,
and Lithuania
 Political Scenario & Britain’s Entry
In1975, UK had held a
referendum on continuing
its membership of the EEC
& it did not join the ERM
In October 1990, Britain
joined ERM
Margaret Thatcher was the PM &
she resisted these ERM calls for
over a decade
There was broad support
for joining the ERM across
the political spectrum.
Major’s There was broad
support for joining the ERM
across the political
spectrum
The Conservative party had
snatched power from The
Labor Party
John Major took over as
prime minister. Major was
among those who had long
supported joining the ERM
 Your Picture Here

0 Black Wednesday's
Underlying Causes
• When Britain joined the ERM, the rate
was set to 2.95 Deutsche Marks per
Pound Sterling with a 6 percent
permissible move in either direction

Your Picture Here • However, after joining the ERM, the

UK boom began to falter and inflation
rose. Market pressure pushed the
Pound lower

• The government can manage the

currency in two ways: Revalue and
devalue the currency and by changing
interest rates.
Black Wednesday

An interview with the President of the German Bundesbank, reported that, “Even
after the realignment and the cut in German interest rates, one or two currencies
could come under pressure before the referendum in France.

Soros and the entire financial markets took these currencies to believe that the
pound sterling was one of those that could "come under pressure and be devalued.
In just one day, this seemingly innocuous paraphrased quote would bring devastation
to the Bank of England and net George Soros over a billion dollars.

Market speculators such as George Soros felt the government’s position was
untenable and at some time they would have to devalue. Soros had actually backed
the pound to the tune of £1.2 billion only one month before Black Wednesday

Through his Quantum Fund, Soros instructed his team to borrow UK gilts and sell
them before repurchasing them later on at a lower price.

George Soros was one of these bearish currency traders, amassing a short position
of more than $10 billion worth of Pound Sterling.
The Flashpoint
8:00 am
By the time London markets
9:00 am opened for business, tens of
Finance minister
contacted Prime Minister and
02 billions of pounds had been sold
and the pound was dangerously
11:00 am told him they couldn't possibly close to trading below the levels
buy up enough pounds to mandated by the ERM.
The British government
keep the currency propped
announced they would
up. The only option left to
increase interest rates 200
basis points, from 10% to 12%.
increase interest rates but 8:40 am

04
Major refused
But nothing happened & the The British officials first
pound continue to plummet. responded by buying
01
Later, another 300 basis
points, from 12% to 15%. 03 one billion pounds
Britain’s Exit

The pound kept falling and the BoE ended up buying more sterling on Black Wednesday
than it ever has before – up to £2 billion per hour - and the rate was lower with virtually
every purchase.

All in all, Soros made £1 billion profit by betting against the pound and the BoE, engraving his name in the
history books forever.

While the Bank of England spent an estimated 40% of its foreign exchange
reserves on propping up the pound, these efforts ended up being futile.

On the evening of 16 September, the Chancellor of the Exchequer, Norman Lamont, announced
that the U.K. was suspending its membership from the ERM. 
Germany's Reluctance

Germany’s central bank, Deutsche Bundesbank, played a significant role in Black

Wednesday. In September 1992 the deutschmark was the strongest ERM currency
and the pound was the weakest.

Germany's central bank refused to purchase the pound and did not sell many
deutschmarks

In the end, not only did the cavalry fail to turn up but they aided the enemy by
fueling reports that the Bundesbank believed the pound needed to be devalued and
therefore spending taxpayers’ money on purchasing the pound was pointless.
Britain after Black Wednesday

01 02 03

The UK’s withdrawal of Europe’s monetary Initial estimates

the pound from the ERM policy committee tried suggested the BoE had
only caused sterling to its best to keep the spent anywhere
suffer further and system intact and even between £13 billion-£27
threatened to bring sought to capitalize on billion on buying the
down the entire the UK’s withdrawal faltering pound on Black
European project. Wednesday, but the true
sum was revealed at
just £3.3 billion.
 Black Wednesday
• The pound’s exit from the ERM caused further
devaluation as the effect rippled through financial
markets around the world.
• After the UK markets closed on Black Wednesday
the sell-off continued as traders in New York picked
up the baton before passing it on to traders in Tokyo
who followed their lead to provide sterling with
another hammering.
• This incident held the UK economy back for five
years and  many dubbed the ERM the ‘Eternal
Recession Machine’
• The political ramifications of Black Wednesday are
still evident today and part of the same story that led
us down the road to Brexit.
OR Bright Wednesday
• Interest rates were gradually cut to 7% and this,
combined with the devaluation, helped lower inflation
to spur an economic recovery.
• It also demonstrated the limitations of interest rates
and highlighted how a ‘one size fits all’ model doesn’t
work
• Black Wednesday fundamentally reshaped both the
political and economic landscapes in the UK and
wider Europe and ultimately stopped the UK joining
the single currency
• Black Wednesday kept the U.K. out of the eurozone
and saved it from more serious economic problems
later on. In particular, the British economy performed
much better during the European sovereign debt
crisis.
Thank you