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First on CNBC: CNBC Transcript: CNBC's Maria Bartiromo Speaks with George Soros, Chairman of Soros Fund Management, from the World Economic Forum in Davos

Thursday, 24 Jan 2013 | 4:43 PM ET

WHEN: TODAY, THURSDAY, JANUARY 24TH

WHERE: CNBC'S "CLOSING BELL WITH MARIA BARTIROMO"

Following is the unofficial transcript of a FIRST ON CNBC interview with George Soros, Chairman of Soros Fund Management, from the World Economic Forum in Davos. All references must be sourced to CNBC.

MARIA BARTIROMO: Thanks so much, Bill. And I am here right now with billionaire investor and lead foundation head, George Soros. He is here with me in Davos. And George, it's always nice to see you.

GEORGE SOROS: This-- nice to see you as always.

MARIA BARTIROMO: Thank you so much for joining us. You know, George, there's so many things to talk about with you, from your foundation to investing ideas to how the world economy is looking with all of your travels. Let me begin on Europe. Europe seems to have taken to the back pages of the newspaper lately. It's not front and center anymore. Is that a reflection, in your view, that things have improved? Where are we in the debt crisis in Europe?

GEORGE SOROS: Well, I think that-- Germany has done what was necessary to allow the-- to make it-- clear that the euro is here to stay. And that has been a tremendous relief-- for the markets. So, calm-- has returned. The European-- banking system, the interbank market, has revived. So, there's a general sense of-- let's say, you-- almost euphoria, that the crisis is over. I think that is somewhat premature. Because the fundamental-- internal inconsistencies in the system have not been addressed. And actually-- therefore, you face-- political dangers. The-- Euro is-- transforming the European Union into something very different from the original conception, which was a voluntary association of equal states. And instead of that, the financial crisis has created a two-class system within the euro, the creditors and debtors. And the creditors are in charge. So, it's basically Germany. And the policies that they are advocating, unfortunately, this austerity, is counterproductive. And it's perpetuating the financial crisis.

MARIA BARTIROMO: Which is what you said recently. You said-- Ms. Merkel is following the wrong policy, because you cannot fight what's going on with austerity--

GEORGE SOROS: That's correct--

MARIA BARTIROMO: --forcing countries to cut back.

GEORGE SOROS: That is correct. You can't deal with the excessive debt-- by-- restricting-- government spending, which results in a declining economy. Because the debt is measured as a ratio between the-- GNP and-- the debt. And so, if the-- if the economy is falling, the debt burden's actually increasing.

MARIA BARTIROMO: Increasing.

GEORGE SOROS: And-- it also perpetuates the divergence between c-- the performance of the creditors and debtors. Because the debtors have to pay a substantial-- risk premium-- on their borrowing. They have to pay-- the premium has come down. And that is what brings the relief. But there still is a significant-- premium, which not only applies to the government debt, but to the-- to the-- to the financing of industry itself--

MARIA BARTIROMO: Right, so it's a vicious circle.

GEORGE SOROS: It-- that's right.

MARIA BARTIROMO: And it keeps getting worse because the markets are reacting and the rates are going higher.

GEORGE SOROS: That's right. So--

MARIA BARTIROMO: And I thought Mario Draghi put an end to that, with his most recent-- stimulus.

GEORGE SOROS: Well, he actually saved-- the euro with the support of Merkel. Chancellor Merkel backed Draghi against-- these sent-- the-- president of the Bundesbank. And that is what enabled Draghi-- to-- who knows what-- how to handle these things to revive the market. That's the-- positive accomplishment. But the political-- situation, I think, is going to get worse. I think the next year, the next two years, perhaps, are going to be very touchy. If the European Union survives that, then it may last for a long time. But not forever. Because I don't think that Europe can live politically with a situation where there's a center (namely, Germany) and the countries like Italy and Spain are condemned to perpetual inferiority.

MARIA BARTIROMO: In fact, we were talking with Axel Weber earlier today--

GEORGE SOROS: Yeah, yeah.

MARIA BARTIROMO: --the former head of the Bundesbank.

GEORGE SOROS: Yeah.

MARIA BARTIROMO: And he said, actually, in the next couple of months, the markets could see a disruption, because you've got some catalysts coming. You've got the debt coming due in Spain. You've got the Italian elections. Do you see these things as potential upsets that perhaps puts this situation back on the front burner, where the markets and economy start reacting?

GEORGE SOROS: Yeah. Any number of things could go wrong. But the-- I think the biggest danger is-- that-- it actually-- potentially-- a currency war. Because the rest of the world-- follows a different recipe from the Germans. Germans believe in austerity. And-- the rest of the world believes in quantitative easing.

MARIA BARTIROMO: Right.

GEORGE SOROS: Making-- money-- throwing more and more money at the--

MARIA BARTIROMO: At money.

GEORGE SOROS: at the crisis. And actually-- that works, in the sense that it avoids a depression. And-- now-- Japan, which has suffered from deflation now for a decade, has also switched to quantitative easing. And that is now-- bringing down-- has already brought down the yen, the value of the yen. Whereas-- the euro, as a last remnant in-- in the-- believing in the-- a s-- sort of cons-- very conservative-- approach—is more likely to appreciate. And that is likely to push Germany, also, into-- a potential recession or slow-- slowdown.

MARIA BARTIROMO: Yeah, and I'm glad you mentioned Japan. Because we're finally seeing some ease-up on the Japanese yen.

GEORGE SOROS: Yeah.

MARIA BARTIROMO: Is that sustainable? Do you think that continues?

GEORGE SOROS: Well, it-- they're certainly-- determined. I mean, this government-- has got to make it happen-- in order to consolidate itself in power, you know, they-- it faces elections in the fall and it has got to actually produce some notable results within that-- period. And-- therefore, I think it's-- different from previous efforts, where there's lip service, but no follow through. Now-- it's a question whether-- Japan actually-- is over the-- or how shall I say, past the tipping point. Because it has indebtedness of over 200%-- it's the highest-- in the major countries. Even on-- a net basis, it's still 140%. So, it's-- it could be that it may be past redemption. But certainly-- this-- Abe government is determined to-- bring about-- a different approach.

MARIA BARTIROMO: It's interesting, because everywhere you look around the world, there's austerity and there's debt. So, we're all trying to rein in the debt, even in the United States. How do you feel about what's going on in the U.S. right now? I mean, here we are, approaching the debt ceiling debate, and we're probably going to have another fight about spending cuts. Would you say we need to get our arms around the debt in the U.S., Rein thing in, cut back? Or do you agree that the way you feel about Europe, no austerity, this is not the approach, applies to the United States as well?

GEORGE SOROS: No, I think it applies to the United States because when you have unemployed resources, putting them-- those resources to work is really-- the first-- objective. And-- you need to-- reestablish growth for shrinking the debt. And so, I think the policy basically-- pioneered by Bernanke is actually the right policy. And the idea of-- having-- let's say, debt which is actually bought by the central bank, the Federal Reserve, you actually don't add to the net amount of debt outstanding. So, it's about as close to a free lunch as you can get.

MARIA BARTIROMO: So, you don't-- so, it doesn't bother you that the Federal Reserve's balance sheet has expanded-- the ECB's balance sheet has expanded. You don't think there are-- risks to the downside, as a result of what we've seen, in terms of these stimulus packages and these accommodative policies from the central banks of the world?

MARIA BARTIROMO: So, it doesn't bother you, then, you're not worried, about the fact that the Federal Reserve has expanded its balance sheet so much, the ECB expanding its balance sheet so much? Is there a downside risk there?

GEORGE SOROS: Yeah, there is a downside risk. Because once the economy gets going, then-- interest rates are going to-- ta-- take a big leap. Because this is a delicate, two-phase maneuver, where first, you throw more money-- at the economy. And as the economy picks up, (HELICOPTER), you have to-- take that money out. And as you take it out and interests rates-- shoot up, that is liable to arrest the recovery. So, this is what's called "stop-go." Rather, it really, it's "go-stop."

MARIA BARTIROMO: Right.

GEORGE SOROS: But it's better to go and stop than not to go at all. So, it's a preferable-- policy, but inevitably, it results to as a slow rate of growth with a interruption.

MARIA BARTIROMO: Are you expecting that, once we see a change in interest rates, that it happens fast, it happens furious? When would you expect a spike in interest rates?

GEORGE SOROS: As soon as there's clear signs of pick up in the economy.

MARIA BARTIROMO: You're not seeing that yet?

GEORGE SOROS: Not-- well, it is actually--

MARIA BARTIROMO: George, when would you expect-- a spike in interest rates?

GEORGE SOROS: It may already have begun, actually. It shows some signs. And-- I think it's-- most likely to happen-- this year, -- once you are past the-- uncertainty about the budget-- the-- and investment decisions are made-- I think you'll see it.

MARIA BARTIROMO: Okay. So, the-- we could see-- actually see it this year, that's-- very interesting that you feel that way. Okay, so, you're traveling a lot. You were just in Burma. Talk to us about Burma. What were you doing there? I want to get your take on what we're seeing outside of the United States. But what was happening in Burma?

GEORGE SOROS: Well-- in Burma-- we have been involved, for the last 20 years, supporting the--democratic opposition. And last year, there was a change in the-- in the attitude of the government. And I went there and they-- asked us to actually establish an office-- officially. So, we are now working with the government as well as-- civil society. And it's a very promising-- moment in-- not without risks. It's-- because it's not irreversible. But-- it- is a very good, positive dynamic, one of the-- hopeful spots in the world. Generally speaking, I'm very optimistic about the democratic development in the developing world. There's a real push for democracy in Africa, in various parts of Asia. I think the elections in-- in-- Malaysia could bring about-- a regime change. So-- there's a very positive-- political-- mood in the developing world. It's the developed world, where there's-- the political situation where democracy is actually failing. But I'm also optimistic in the United States.

MARIA BARTIROMO: You are?

GEORGE SOROS: Yes. Because-- the-- you know, the-- Republicans-- are t-- are trying to destroy the financial base of the Democratic Party by insisting on-- cutting government expenditures and destroying the service unions, which were the financial main-- one of the main financial supporters of the Democratic Party. Now, the tables are turned. And actually, Obama is trying to-- split the Republican Party-- between the Tea Party and-- the more established, business-oriented, the-- sort of-- call it-- conserva-- genuine conservatives. And-- I think that the Tea Party has o-- overstepped and-- will be out in the wilderness. And if that happens, then the two-party system will genuinely start working again. Because then, you will have two parties, each of which tries to capture the middle ground. Whereas, in-- for the last 20 years, they've had-- an extremist wing in the Republican Party that pushed it further and further out and the Democrats had to follow it. So, the-- somehow, things got-- too--distorted. So, I-- I'm ho-- hopeful that, actually-- democracy-- the two-party system, will start functioning again.

MARIA BARTIROMO: You've been spending more and more time with your foundation-- the second largest foundation-- $800 million-- you-- you're allocating. How are you allocating that-- that money? Tell me where the need is in the world today.

GEORGE SOROS: Well-- it's such a-- such-- a broad-- range of issues-- that it would be a laundry list. Because we are practically involved in all the burning issues. But-- we are in a new phase because-- the-- foundation has been growing. Because actually, I was producing money. Now, I've retired from money making, so our funds are more limited. And therefore, we have to use them more-- effectively and efficiently. And that is what I'm trying accomplish. And that's a very challenging, but very exciting-- task.

MARIA BARTIROMO: I know you're not managing, day-to-day, in terms of investing it and making moves, but what was your opinion of AIG suing the government? AIG, of course, your largest stock holding by market value in the third quarter last year. Do you agree with this lawsuit?

GEORGE SOROS: I have-- I have no idea. The I am not involved in that.

MARIA BARTIROMO: Right. Well, we should say it's the largest shareholders of AIG suing the government. And of course, the backlash, AIG not going along with that suit. Was that--

GEORGE SOROS: No, I am-- I have-- I haven't been following it.

MARIA BARTIROMO: Okay. Okay. Let me ask you-- I know you're doing a press conference. You're speaking-- later on this week about drug policy. Why is this top of mind for you?

GEORGE SOROS: Well-- I have been involved for more than 20 years because-- it's-- it-- the-- war-- I don't know what the solution to the drug problem is. It actually probably has no solution. Because addiction-- there is some addiction in every society, so there's no-- there's no drug-free-- society. However, the war on drugs has done-- much more damage than the drugs themselves. And-- I-- we need a different approach. And for the first time since I've been involved, I see a real push, a real opening-- for that. A lot of it is coming from Latin America, where now-- sitting presidents are-- clamoring for a change in policy. I think it's-- also gr-- gaining ground in-- in America because of the financial crisis, where-- you know, putting-- nonviolent-- offenders in prison is a very expensive-- in California, you are spending more on the prison system than on an-- on the education system. I find that totally unacceptable.

MARIA BARTIROMO: That's amazing.

GEORGE SOROS: So, I think there's change in the wind. And-- that's another area where I see-- improvement. So, actually-- there's a lot of things going on where, you know, having tried everything-- all the alternatives, we are beginning to do the right thing.

MARIA BARTIROMO: And it's interesting. We've been hearing a lot of money moving into Mexico. How do you balance investing in-- in an-- in a region when you've got such an issue like this, the drug trade?

GEORGE SOROS: Yeah. Well, you--can be pretty sure that they'll also-- bring that situation under control. Because-- disturbing the drug trade, it was like, you know-- stirring up a hornet's nest-- which then created a really serious security problem. They're-- I think they are going to-- deal only with the-- with-- trying to-- control killings. And the-- that may calm-- things down. So, I think it's-- exactly because it's so bad, it's bound to improve.

MARIA BARTIROMO: George, good to have you on the program. Thanks very much.

GEORGE SOROS: It's my pleasure.

MARIA BARTIROMO: George Soros joining us. And Bill, I'll send it back to you.


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