The Crises of the 1990s

The financial crisis of 2008 and the euro crisis are undoubtedly among the most worrisome crises of the past few decades. There were, however, also crises before these, even though their effects in most cases remained regionally contained (while still creating enormous economic problems in the regions concerned). In September 1992, the crisis of the British pound made headlines. The pound was pegged to the other European currencies through the European Monetary System (EMS). However, this led to an overvaluation of the pound relative to the strength of the UK economy. Politicians and central bankers refused to acknowledge this – at least, they didn’t take any actions as a consequence (in the background there were in addition tensions in the EMS as a result of Germany’s reunification and the pending European currency union). However, a number of fund managers, among them George Soros, recognised the pound’s overvaluation and proceeded to bet against it to the tune of billions. They sold the pound short and eventually forced the British to abandon the defence of their currency. The pound fell and the hedge funds made big profits. Subsequently, they were accused to have been responsible for the crisis. However, after the devaluation the funds had to buy back exactly the same amount of pounds they had previously sold short.