Budapest: The global economic recovery is liable to run out of steam and the risk of a double-dip recession remains real, billionaire investor George Soros said on Friday, a day after the US economy returned to growth.
The world financial system needs to be reinvented to prevent a repeat of the crisis, Soros told a lecture in Budapest, calling for a new Bretton Woods conference to revise the IMF's methods of operation and consider new rules to control capital movements.
"I regret to tell you that the recovery is liable to run out of steam and may even be followed by a 'double dip,' although I am not sure whether it will occur in 2010 or 2011," Soros said.
The US economy grew for the first time in more than a year in the third quarter, data showed on Thursday, signalling the end of the worst recession in 70 years.
Soros said the total freedom of financial capital to move around globally has proved to be a source of instability and needs to be curbed, along with the "dangerous imbalances" caused by the dollar's use as the dominant international currency.
"The dollar no longer enjoys the trust and confidence it once did, yet no other currency is in a position to take its place," Soros said in his lecture.
"The United States ought not to shy away from the wider use of Special Drawing Rights (SDRs). That should induce China to abandon its peg to the dollar and that would be the best way to reduce international imbalances."
Soros said China would emerge as the big winner of the global crisis, benefiting from an undervalued currency and a large trade surplus.
Unlike for China, for the West and the US the crisis was an internally generated event which led to the collapse of the financial system, he said.
"For China, it was an external shock which hurt exports but left the financial, political and economic system unscathed," Soros said.
He said China was expected to maintain capital controls but will establish bilateral clearing accounts with some countries, like Brazil, denominated in yuans.
"This will diminish the status of the dollar as the international currency without replacing it," he said.
Soros said the dollar could still reassert itself as the preferred reserve currency, provided it is prudently managed.
The US should stand at the forefront of reforming the world financial system as this could reestablish American leadership after the Bush era in which the US lost a lot of its global influence, he said.
Soros added that the US banking system has to earn its way out of a hole, while in commercial real estate and leverage buyouts, the "bloodletting is yet to come."
Bureau Report