Black Wednesday refers to the day when the British government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM). It took place on 16 September 1992 which is remembered as a dark day in British economic history (Tarzi, 1999).
Setting the Stage for Black Wednesday
In March 1979, the European Exchange Rate Mechanism (ERM) was set up in order to reduce exchange rate variability and achieve financial stability across Europe. Under the ERM system, the member nations were required to fluctuate their currencies within a specific range relative to each other.
Britain initially declined to join ERM when it was first introduced, but later adopted a semi-official policy which shadowed the Deutsche Mark (a German currency). Having said that, Britain decided to join the ERM in October of 1990, after a shake-up in leadership. When the country entered the ERM the pound’s value failed to stay within a specific rage. The country prevented its currency from fluctuating more than 6 percent in both upper and lower margin direction by intervening in the currency markets with countertrades.
Black Wednesday’s Underlying Causes
After joining the ERM, Britain set their currency at a rate of 2.95 Deutsche Marks per British pound with a 6 percent permissible move in either direction. At that time, the status of pound sterling currency was so weak in the ERM and struggled to remain within the aforementioned range. British government official placed upward pressure in order to make its currency strong by hiking its interest rates from 10% to 15% in the space of one day. However, this move failed to conciliate the concerns of market participants who were doubtful of the British government’s ability to stabilize the pound.
Currency traders took note of these problems and they began shot selling the pound sterling. In that time, they borrowed and immediately converted British currency into a foreign currency with the agreement to re-convert them in the future. George Soros was one of these bearish cash dealers, accumulating a short position of more than $10 billion worth of British currency.
ROLE OF SPECULATORS
George Soros is a businessman and one of the most famous currency traders in the world. He is an intensely intellectual man who spends much of his time in Eastern Europe as educational and political philanthropist (Kaletsky, 1992). He is known as the “Man Who Broke the Bank of England” as of going short against the Bank of England. A billionaire investor George Soros sought to turn a profit by borrowing U.K. gilts and selling them, before buying them back at lower prices later on. Reportedly, he repeated this process which made him a profit every couple of minutes.
References
Kaletsky, A. (1992, Oct 26). How Mr Soros made a billion by betting against the pound;George Soros. The Times .
Tarzi, S. M. (1999). Financial globalization and national Macroeconomic policies: Managerial challenges to the nation-state. The Journal of Social, Political, and Economic Studies, 24 (2).
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Black Wednesday refers to the day when the British government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM). It took place on 16 September 1992 which is remembered as a dark day in British economic history (Tarzi, 1999).
Setting the Stage for Black Wednesday
In March 1979, the European Exchange Rate Mechanism (ERM) was set up in order to reduce exchange rate variability and achieve financial stability across Europe. Under the ERM system, the member nations were required to fluctuate their currencies within a specific range relative to each other.
Britain initially declined to join ERM when it was first introduced, but later adopted a semi-official policy which shadowed the Deutsche Mark (a German currency). Having said that, Britain decided to join the ERM in October of 1990, after a shake-up in leadership. When the country entered the ERM the pound’s value failed to stay within a specific rage. The country prevented its currency from fluctuating more than 6 percent in both upper and lower margin direction by intervening in the currency markets with countertrades.
Black Wednesday’s Underlying Causes
After joining the ERM, Britain set their currency at a rate of 2.95 Deutsche Marks per British pound with a 6 percent permissible move in either direction. At that time, the status of pound sterling currency was so weak in the ERM and struggled to remain within the aforementioned range. British government official placed upward pressure in order to make its currency strong by hiking its interest rates from 10% to 15% in the space of one day. However, this move failed to conciliate the concerns of market participants who were doubtful of the British government’s ability to stabilize the pound.
Currency traders took note of these problems and they began shot selling the pound sterling. In that time, they borrowed and immediately converted British currency into a foreign currency with the agreement to re-convert them in the future. George Soros was one of these bearish cash dealers, accumulating a short position of more than $10 billion worth of British currency.
ROLE OF SPECULATORS
George Soros is a businessman and one of the most famous currency traders in the world. He is an intensely intellectual man who spends much of his time in Eastern Europe as educational and political philanthropist (Kaletsky, 1992). He is known as the “Man Who Broke the Bank of England” as of going short against the Bank of England. A billionaire investor George Soros sought to turn a profit by borrowing U.K. gilts and selling them, before buying them back at lower prices later on. Reportedly, he repeated this process which made him a profit every couple of minutes.
References
Kaletsky, A. (1992, Oct 26). How Mr Soros made a billion by betting against the pound;George Soros. The Times .
Tarzi, S. M. (1999). Financial globalization and national Macroeconomic policies: Managerial challenges to the nation-state. The Journal of Social, Political, and Economic Studies, 24 (2).