„Europe is gradually running out of time and options“

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Ansgar Belke, former Research Director for International Macroeconomics at the German Institute for Economic Research in Berlin, talks in depth about a paper that he authored for the EU Parliament on using gold as collateral for highly distressed sovereign bonds.

By Lars Schall

The following interview was published at Asia Times Online here.

Ansgar Belke is Professor of Macroeconomics and Director of the Institute of Business and Economic Studies (IBES) at the University of Duisburg-Essen in Germany. Moreover, he was the Research Director for International Macroeconomics at the German Institute for Economic Research (DIW), Berlin until October 2012. Since this year he is (ad personam) Jean Monnet Professor.

He is, inter alia, member of the „Monetary Experts Panel“ of the European Parliament and the Committees for Economic Policy and International Economics within the German Economic Association. He is also an Associate Fellow of the Centre for European Policy Studies (CEPS), Brussels, a member of the professional central bank watchers group „ECB Observer“ and an external consultant of the European Commission (DG ECFIN), Brussels. He successfully conducted projects on behalf of the German Ministries of Finance and of Labour and Social Issues. He was visiting researcher at the IfW Kiel and OeNB Vienna.

Belke serves as the editor-in-chief of „Kredit & Kapital“, „Konjunkturpolitik – Applied Economics Quarterly“ and as a co-editor of „Finance“, „Empirica“, „International Economics and Economic Policy“, „Vierteljahreshefte für Wirtschaftsforschung“, „Aestimatio – The International IEB Journal of Finance“, „E-conomics“ (Kiel Institute of the World Economy) and of the book series „Quantitative Ökonomie“, Eul Verlag. He co-authored (with Thorsten Polleit) the book “Monetary Economics in Globalised Financial Markets”, Springer Verlag.

Lars Schall: How did it come about that you authored a paper for the EU Parliament related to gold-backed bonds? (1)

Ansgar Belke: This was really necessary because we lack any solution to the current Euro crisis and politicians tried on and on to solve the crisis with ineffective and partly counterproductive efforts to use monetary policy to solve the structural issues the eurozone is currently plagued with.  The European Central Bank opened up its third round of secondary bond market purchases on 6 September 2012. Whether they deliver a permanent reduction in bond yields in the South is highly uncertain. If the ECB’s latest sovereign bond purchase program consisting of Outright Monetary Operations (OMTs) fails, then Europe’s options look grim.

Austerity and growth programs have not met expectations and the outlook is further clouded by the fact that the funds available from the IMF and EFSF/ESM are dwindling as a result of other bailouts. Of course, sovereign bond yields have been artificially driven down in the short run by politically motivated too optimistic assessments of debt sustainability in some eurozone member countries. What is more, downward pressure on bond yields has been exerted by the expectation of investors such as Blackrock, Goldman Sachs and a couple of Hedge Funds that the ECB will step in to buy sovereign bonds even if conditionality is not met by these countries. This cannot be called a healthy and sustainable thing. Thus, it seems fair to state that Europe is gradually running out of time and options.

Already the now terminated predecessor of the OMTs, the Securities Market Programme (SMP) has always been a controversial option, riddled with potential dangers. It is seen by many as a de facto fiscal transfer from the North to the South and, moreover, a transfer made without democratic consent. By showing willingness to buy the debt of poorly performing countries, the SMP was seen as reducing credible incentives for necessary long-term reforms. In addition, although the ECB tries to ‘sterilise’ these transactions, this is far from an exact science, leaving a risk of higher money supply fuelling inflation in the medium to long run.

An alternative manner which serves to lower yields might be to issue securitized government debt, for example, with gold reserves. This could achieve the same objectives as the ECB’s bond purchases programs, but without the associated shortcomings. This would clearly raise legal issues but then so too did the ESM, SMP and OMT. This would not work for all countries but would for some of those in most need. In fact, Italy and Portugal have gold reserves of 24 and 30 percent of their two-year funding requirements. Using a portion of those reserves as leveraged collateral would allow those countries to lower their costs of borrowing significantly.

L.S.: Are there other advantages in using gold?

A.B.: Making use of the national central banks’ gold reserves is much more transparent than the SMP, it is much more attractive for investors, much fairer, and would make it easier to get genuine consent amongst the euro area population and the European Parliament. Nor does it lead to unmanageable fiscal transfers from the North to the South with huge disincentive effects. It does not shift toxic debt instruments onto the ECB. And it does not cause sterilisation problems or increase the difficulty of exiting unconventional monetary policy – the gold-backed bond solution avoids the path-dependence of the existing solutions. Simply speaking, a gold-based solution is much less inflation-prone because it is using a real asset and does not reduce incentives for the reform of beneficiary countries. It does not touch the ECB’s balance sheet but the SMP and OMTs deploy it.

I saw that the Securities Market Program, the SMP, which started in May 2010 did not solve many of the problems. It had many disadvantages and, in addition, the European Central Bank came up with a proposal of unlimited sovereign bond purchases in September 2012 which also had many obvious drawbacks.

A couple of them were, for instance, that this was not transparent. Just to go for sovereign bond purchases in the SMP. It was not made public which and at what amount the sovereign bonds were purchased, from which country for instance. These bond purchases had a lot of drawbacks like elements of subsidy, there’s moral hazard included if you buy sovereign bonds from countries which do not sustainably stick to any rules concerning the budget is a problem for those who are sticking to it. The latter are punished in a sense and the others are rewarded.

L.S.: The question may be raised what will be happening if the sovereign bonds are taken on board of the ECB will devalue, who will feel the cost?

A.B.: This is not clear. The problem with all these kind of alternative solutions is that they endanger the financial and political dependence of the ECB. You do not know how to sterilise these purchases. Maybe there’s some inflationary danger included because you have toxic debt instruments on board of the ECB and there is a huge degree of path dependence. And, of course, if you go for an accommodative monetary policy stance, this has a negative impact on the incentives to reform which have to be pushed through in the Southern part of the Euro area.

There are a lot more problems with the SMP and OMT solutions. Only sovereign funds, including gold-backed sovereign bonds, disclose genuine opportunity costs to the initiators. But choosing money printing press, opportunity costs of appropriate adjustment programs wrongly appear to approach zero since ECB programs are not sufficiently transparent. The interest rates are near zero and they do not signal the opportunity costs of all rescue measures currently implemented and conducted by the ECB and the Troika because all the negative side-effects of it have to be neutralised in the future. For instance if you buy bonds, sovereign bonds, this is a huge problem because you damage the value of other bonds and shares; this might severely hamper refinancing possibilities of healthy firms and banks. You take away sound investment possibilities for pension and insurance companies and there are other side effects.

Note also that the ECB can attach conditions to its gold transfer such as implementation of structural reforms. The move to gold-backed bonds would not only fix the monetary transmission mechanism but also provide time to implement necessary reforms.

Anyway, the potential loss of gold for a country like Italy and Portugal might well serve as disciplining device for the fiscal policy behaviour of the respective government. This is exactly what the Finnish government was keen on when negotiation about the shape and the rules of the future ESM.

L.S.: Is this some sort of dark pedagogy? I mean, you punish them in a way if they have to give up their gold.

A.B.: Yes, but using gold as a pledge helps them like a covered bond does: it attracts investors and, thus, strengthens the position of financially distressed member countries which themselves are guarantors of the eurozone rescue mechanism ESM – an additional benefit of gold-backed bonds which may not be forgotten . If you try to simulate the effects of gold backing of bonds, you can clearly see that, for instance, for Portugal (where we did this) that the sovereign bond yield can be lowered by about 4 basis points. This is due to the fact that the recovery rate is increasing in the case of insolvency of a country and, in addition, the default probability is going down.

So, the process itself is rewarding for the country itself, it doesn’t lead to more damage but, on the contrary, to less damage. So, it is an obvious alternative to go for gold-backed sovereign debts with the benefit of temporary effects and a bridge financing character. As I mentioned earlier, gold has been used in the past already as collateral to help some countries to raise loans. Where we can look back to the 70s where Germany granted a loan to Italy and this was gold-backed whereas the interest rate effect of this operation has never been published. Instead, it was kept secret.

Moreover, gold prices tend to move counter-cyclically. This reinforces its stabilising effect in current situation of financial stress. And what I would like to stress again this is not intended to simply raise revenue for many short selling of gold, this is more intelligent solution. This gold is available to the ECB.

L.S.: Why does the gold-backed solution make sense in your view?

A.B.: Seen on the whole, if I look at the SMP and OMTs, they are not quite consistent, especially because the ECB uses or has announced the OMTs (Outright Monetary Transactions) in order to repair the monetary policy transition mechanism and if, for instance, Spain approaches the ESM, ask for some help and only has to fulfill very light conditions. This is a problem of credibility then for the ECB because everybody is betting that the ECB is still getting in although countries like Spain may not fulfill the conditions because it would be inconsistent to stop repairing the monetary policy transition mechanism even if a country does not stick to the conditions. What is more, after the retreat of Mario Monti, the political system and reform activity in Italy currently does not appear overall stable.

All this, taken together, was the intended incentive to look for an alternative means to help countries under financial distress in order to get back to the markets, access to the markets.

Accordingly, it might turn out after some weeks that the announcement of complementary ECB measures announced on September 6th will not deliver a permanent reduction in bond yields in the South. Then, at the latest, one should look for a „last resort“ solution, since the supply of alternative options looks to be exhausted because all austerity and growth programs do not meet the expectations. Additionally, international support from the IMF, the EFSF and other institutions usually granted to troubled economies and preferred over gold-backed issuance is stretched as a result of other bailouts.

One obvious alternative would be to go for gold-backed sovereign debt. Despite all current denials, the point in time may have come to use valuable and fungible assets such as gold to provide the Southern countries with temporary, but crucial in the current crisis of confidence, bridge-financing heading towards a complete long-term solution.

To be explicit, such a proposal does not address the gold-backing of euro or stability bonds whose usefulness is conceded by the EU Commission only in the very long perspective (2). The EU Commission proposes in its Green Paper on the feasibility of introducing Stability Bonds that Stability Bonds could be partially collateralised using cash, gold, or shares of public companies.

Note in this context that Prodi and Curzio (3) argue that further innovation is necessary with a European Financial Fund (EFF) that issues EuroUnionBonds (EuBs). According to their proposal, euro area member states confer capital to the EFF proportionally to their stakes in the ECB. The capital should be constituted by gold reserves of the European System of Central Banks. Gold could be placed as collateral. Nor is my gold-backed bond proposal directly related to the recent debt redemption funds proposal by the German Council of Economic Advisors according to which the EFSF and later also the ESM firepower should ultimately be increased by a gold coverage of bonds. (4)

It is by now clear that even in the fourth quarter of 2012 and the first half of 2013 the euro area will stay under significant stress. But it is not at all clear whether the ECB or the euro area governments will de facto be able to act properly to choke market fears and bring down (allegedly) overly high government borrowing costs. As unease builds, it may be time to explore new ideas to cut interest rates.

A new idea would be the gold backing of new sovereign debt. It is common knowledge that a few countries which are the most affected by the euro crisis, Portugal and Italy, hold large stocks of gold. In aggregate, the euro area holds 10,792 tonnes of gold, that is 6.5 per cent of all the yellow metal that has ever been mined, and worth some $590bn.

As expected, this scenario was the trigger for some to propose that not only the financially distressed governments should sell some of their gold (5) Over the last couple of years, the value of gold has soared. And a popular view is, if there were ever a suitable time that euro area member countries are in need of an unanticipated windfall gain – for instance, to pay interest on their sovereign bonds – it would be now.

L.S.: Would this be a mistake?

A.B.: Yes, for quite apart from the fact that a massive dump of gold would dampen its price, the euro area debt woes are now so large such that gold sales would only scratch the surface of the problem. This is because the gold holdings of the financially distressed euro area countries (Greece, Ireland, Italy, Portugal and Spain) would account for only 3.3 per cent of their central governments’ total outstanding debt.

Through issuing sovereign bonds backed by gold, euro area member countries should securitise part of that gold instead. The latter could be enacted in a rather simple way. But one could also structure it to contain tranches of different risks. The main point in both variants is that gold would serve to provide sovereign bonds with further safeness – and thus comfort investors who do not give credence to euro area government balance sheets any more.

I am quite aware of the fact that this is problematic from a legal point of view because as I just stressed central banks in the EU area are independent and also the European System of Central Banks is independent but if you, for instance, have the ECB deciding, in full independence, about offering gold for such kind or a solution and this is working via a debt agency.

L.S.: You believe that gold has an important role to play in helping distressed Eurozone countries and you have investigated how this could work – what did you find as benefits?

A.B.:  Using gold as collateral for new sovereign debt issues would alleviate some pressure in the short term and facilitate a return to growth.  Gold-backed bonds would have an advantage over the existing non-conventional monetary policy tools to tackle the Eurozone debt crisis to date. The ECB’s balance sheet would be unaffected, as the gold that sits within national central bank reserves would be more than sufficient to collateralise the bonds.  And it would lower sovereign debt yields without increasing inflation and would give some distressed countries time to work on economic reform and recovery.

L.S.: Why would this rather work for Italy and Portugal than for other Eurozone countries?

A.B.: Not all Eurozone countries have enough gold in their reserves for this to be a viable solution. However, for those with significant holdings, such as Italy and Portugal, which are accidentally those in most need this represents a real alternative. Using gold as collateral would not work for all countries but would do so for some of those in most need. France and Germany hold significant reserves but enjoy – in the case of France relatively – low unsecured borrowing costs. Of course, my gold-backed bond proposal might gain popularity when France as a candidate for severe problems will come to the forefront of the euro dilemma.  Greece, Ireland and Spain, on the other hand, don’t hold enough gold for it to be a viable solution. Italy and Portugal, however, hold gold reserves of 24 and 30 percent of their two-year funding requirements and and gold-backed bonds could have a material impact of their debt servicing costs. For the case of Portugal, my paper demonstrates that a sovereign bond backed by one-third with gold could reduce yields on sovereign debt by as much as 3 basis points.

It is important to note in this respect that Gold has been already used in the past by a couple of countries to raise loans. In history, collateral schemes have been utilized before on quite a few occasions. In the 1970s, for instance, Italy and Portugal employed their gold reserves as collateral to direct loans, not bonds, from the Bundesbank, the Bank for International Settlements and other institutions like the Swiss National Bank. Italy, for instance, received a $2bn bail-out from the Bundesbank in 1974 and put up its gold as collateral. More recently, in 1991, India applied its gold as collateral for a loan with the Bank of Japan and others. And in 2008, Sweden’s Riksbank used its gold to raise some cash and provide additional liquidity to the Scandinavian banking system. Countries have in history headed towards their gold reserves only in their toughest situations. What is more, lenders are most probably requiring that this gold is transported to a neutral location. This reveals that gold-backed bonds could help in some respects but would not be a full and all-comprising solution. Questions arise, for instance, over the unintended impact on unsecured debt yields.

L.S.: There are some legal hurdles to be overcome – how do you think this can be achieved?

A.B.: Like every other solution being presented in the Eurozone, there are a number of legal issues that need to be considered for gold-backed bonds to proceed. The fact that Eurozone gold is held and managed by central banks and not governments is a key issue – but these are surmountable. But clearly: it has to be recognised that there are legal and political considerations, as there were and still are with the SMP and the OMTs, against which the German Constitutional Court potentially will go to the European Court.

The first critical issue is reserve ownership. In most countries, gold reserves are held and managed by central banks rather than governments. Specifically, in the euro area, gold reserves are managed by the Eurosystem which includes all member states’ central banks and the ECB. This is settled in the Treaty on the Functioning of the European Union, Article 127, and Protocol on the Statute of the European System of Central Banks (ESCB) and of the ECB, Article 12.

The second issue is central bank independence. National central banks must remain independent of governments in pursuit of their primary objective of price stability. The EU treaty expressly prohibits direct financing of governments by central banks. One should be mindful of the legal issues that this will raise and that such a suggestion will be highly controversial. It is specifically likely to raise questions as to whether or not this represents a breach of the prohibition on monetary financing. National central banks must remain independent of governments in pursuit of their primary objective of price stability. This is settled in the EU Treaty, Article 130. What is more, the EU treaty expressly prohibits direct monetary financing of governments by central banks. This can be derived from the EU Treaty, Article 123.

The third issue is related to the limited potential of gold reserve sales. There are longstanding gold sale limits which are valid until 2014 that could potentially limit collateral transfers and would need to be addressed. The Eurosystem central banks are currently signatories to the 3rd Central Bank Gold Agreement (CBGA) which restricts net sales of gold reserves to 400 tonnes p.a. combined (6). A number of other major holders – including the US, Japan, Australia and the IMF – have announced at other times that they would abide by the agreement or would not sell gold in the same period. Hence, the CBGA agreement could serve as a constraint on the size of potential gold reserve transfers until 2014, as it commits signatories to collectively sell no more than 400 tonnes of gold p.a. between September 2009 – 2014. Gold collateral could be interpreted as outside the scope of the CBGA or the maturity of the bonds could be staggered in order to limit the amount of gold coming onto the market in the event of a default.

To summarise: there are clearly important legal issues that need to be addressed, but then that was also the case with the ESM, SMP and OMT. European legislation may need to be amended to accommodate a gold pledge for sovereign debt. This could be done by elaborating an amendment to the Treaty which establishes pledged gold as segregated from Euro system central banks and other national banks.

L.S.: Could that kind of gold policy provoke a deflationary shock?

A.B.: No, in terms of inflationary or deflationary dangers, it seems to be neutral because if you look at the balance sheet of the ECB, you can compare sovereign bond purchases with the kind of solution I propose, the gold-backed bonds. In the case of bond purchases you have an increase on both the asset and the liability side of the balance sheet. You buy the bonds and on the right-hand side the monetary base has increased. If you try to do the bookkeeping for gold-backed bonds, you instead have a change of positions at the claims side of the balance sheet. You give up some gold, but in exchange you receive a claim on a debt agency which receives this kind of gold and because this kind of gold makes the sovereign bonds a kind of covered bond, they are safer. And what you have in exchange does not necessarily lead to a decline in the monetary base in the ECB and ESCB balance sheet because this is structurally different. By the way: this has nothing to do with the working of a gold standard, for instance, where, of course, the limited availability of gold might hamper growth. This is something completely different.

A deeper analysis of this issue thus has to take into account that our proposal leads to a change of items on the asset side of the ESCB, i.e. an exchange of gold against claims of the debt agency. But whereas gold is a pledge and thus automatically returns onto the ESCB’s balance sheet, the purchased sovereign bonds have in the end to be sold actively by the ESCB. (Note also that, for the same reason, a gold-backed bond very much like a covered bond is much more attractive for risk-averse private investors.) This makes significant and permanent fiscal transfers under bond purchasing programs even more likely. However, it would clearly be preferable to a revival of the ECB bond-buying program SMP in the shape of the OMT, which shares the same inherent flaw.

L.S.: Do you think that this response could be the trigger for inflation or create a fiscal transfer between northern and southern Europe?

A.B.: Gold-backed bonds would not represent a fiscal transfer from north to south. It would increase incentives for economic reforms and would not have the same inherent inflation risks as the ECB’s Outright Monetary Transactions (OMT) scheme. Not all Eurozone countries have enough gold for this to be a viable solution for, but some – in particular Italy and Portugal – do.

L.S.: What is the response of the EU with regards to your paper?

A.B.: The paper received a lot of attention in the European Parliament because it was published there as a regular briefing paper in advance of the visit of ECB President Mario Draghi and is made available online to all the parliamentarians. Note again that making use of the national central banks’ gold reserves is much more transparent, being an important argument vis-à-vis the euro area population and also the European Parliament which traditionally lays much emphasis on transparency of EU governance.

In addition, I had some press conferences on the paper in Brussels, Frankfurt, Rome and London. These press conferences were attended by a lot of people, from different peer groups such as politics, the finance industry and science. Of course, I was totally clear about the fact that you have, in first instance, to persuade central bankers of this idea. And that especially Italian central bankers would not be very pleased by this proposal. Although they went in very strongly in favour of the OMPs or SMPs which to a certain extent pose the same legal problems.

They are mainly arguing with reference to central bank independence that it is difficult to give it up just to monetary finance public debt via gold sellings. This caveat has to be treated carefully but I am sure that we can deal with it because EU law is in flux.

If you are careful and the ECB would decide in independence this would be manageable, because this would have nothing to do with monetary financing of public debt because you have a debt agency included and the gold-backed bond is stabilising the bonds at hands. Under gold-backed bonds, monetary policy would have a lower probability to be called in as a lender of last resort. If a country is stabilised also the financial power of th ESM would be enhanced, because the guarantor capacity of a country like Italy would be strengthened by this. So, in turn, the probability for the ECB to be caught in would be lowered and this proposal would receive higher acceptance, of course, in member countries such as Germany. The reason is that the potential losses are borne by specific countries and not by the largest shareholder of the ECB.

Some even say that gold-backed bonds do not imply any transfer of credit risk between high risk and low risk countries. This is different as compared to the ECB’s sovereign bond purchases which lets the central bank incur many credit risks along national lines and in effect re-nationalises the eurozone’s monetary policy.

L.S.: Is the gold variant as a solution politically enforceable at all?

A.B.: My answer is yes: the concept of gold-backed bonds certainly is worth a closer discussion. As noted by myself earlier, sovereigns should only consider gold-backed debt in specific and distressed circumstances. Hence, the need for refinancing within the euro area must be overwhelming in order to receive political support from the South for gold-backing. Clearly, financing costs must have become unsustainable as a requirement for public support of a gold-backing of sovereign bonds: a high inflation perspective limits the ability to perform quantitative easing, that unsustainable sovereign yields are offered by the public markets and the debt-to-GDP ratio is untenable. With an eye on the legal issues involved it is, above all, the members of the ESCB which have to be persuaded.

Too bad that the arguments against the use of gold are raised by central bankers such as Banco d’Italia Governor Visco from Italy – a country abundantly equipped with gold reserves – who themselves have favoured a revival of the SMP, now in the form of the OMT, implying even larger legal problems than gold-backed bonds. Both variants of unconventional monetary policy collide significantly more with the EU Treaty and the ECB Statute.

L.S.: Do you think your paper will gain popularity when the candidates for severe problems, Italy and France, will come to the forefront of the Euro dilemma?

A.B.: At least with respect to Italy, because 24 percentage points of the country’s two-year refinancing needs can be covered gold. This is, might become a topic and it is a topic right now. As mentioned before, in Italy it is already discussed by some colleagues who bring forward the idea of a gold-backed fund. They even come up with two larger solutions based on gold. But I myself am quite skeptic about whether we have sufficient amounts of gold available in the eurozone to cover such long-run solutions like the redemption fund which is proposed by the German Council of Economic Advisors and explicitly alludes to a gold-backing in order to persuade the countries to take part as creditors and guarantors and also the stability bond proposed for the longer run, ie. for the period beyond 5 years, by the Commission which also explicitly alludes to gold coverage.

I am more fond of thinking about the bridge-financing idea which is based on a high value collateral, namely gold. And I think that, of course, gold comes to the agenda if Italy comes again under financial stress and to the forefront of the euro dilemma because Italy is a country which suffers from a confidence crisis and not of an insolvency crisis. And this is exactly the case for implementing an additional bridge-financing option and not a permanent fund. The reason is that all the macroeconomic data I’m aware of says that there’s much wealth in Italy available to cover foreign claims. They have saved enough in the past and also foreign debt is not as high as in other countries. So, Italy is clearly a case for gold-backed bonds, both from a perspective of availability of gold collateral and with respect to the character of the crisis. One should remember that even the ECB/ESCB which consists also of the Banca d’Italia can attach conditions to their potential gold transfers, such as the implementation of structural reforms. Hence, Italy seems to be a kind of ideal application of the gold-backed bond solution.

L.S.: What, do you think, are the implementation perspectives of gold-backed bonds in general?

A.B.: Only a decade ago, it appeared rather old-fashioned to ever suggest that any investor would claim gold as collateral; in the era of cyber finance, securities such as treasury bonds tended to rule. However, over the past few months, groups like LCH.Clearnet, ICE and the Chicago Mercantile Exchange have to an increasing extent begun to accept gold as collateral for margin requirements for derivatives trades. In addition, in summer 2012 the Basel Committee on Banking Supervision issued a working paper in which it suggested that gold should be one of six items to be employed as collateral for margin requirements for non-centrally cleared derivatives trades, joint with assets such as treasury bonds. (7) 

Finally, Curzio (8) acknowledges that when Romano Prodi suggested in 2007 that Italy should use its gold reserve to pay the debt, the reaction was negative. The Italian Finance Minister in 2009 wanted to tax gold and the European Central Bank opposed the idea. Curzio concludes that Italy at the moment has little resources to invest in growth and should consider asking Germany or any other Asian sovereign fund for a loan with its gold reserve as collateral. Rather, Curzio and Prodi suggest using gold reserves as collateral for a bond. (9

Much in the same vein, Giuseppe Vegas, Chairman of Consob recently suggested a treasury fund with the rating of ‘Triple A’ collaterized by the jewels of the state namely the shares of ENI, ENEL, buildings, gold reserves and currency as an instrument to reduce the interest payment on the government debt. (10)

All these moves taken together suggest to me that a creeping change of attitudes is going on. This evolution takes place less in terms of the desirability of gold per se, but more through the growing riskiness and undesirability of other allegedly “safe” assets like sovereign bonds. This pattern will probably not reverse soon. This is so especially because markets long waited to see what the ECB might really do after September 6th and, after this date, whether Spain would be the first case for outright market operations a couple of months later.


(1)   Ansgar Belke: A More Effective Euro Area Monetary Policy than OMTs – Gold-Backed Sovereign Debt“


(2) http://ec.europa.eu/europe2020/pdf/green_paper_en.pdf

(3) http://www.ilsole24ore.com/art/economia/2011-08-23/eurounionbond-here-what-must-084308_PRN.shtml

(4) For more on this debt redemption funds proposal by the German Council of Economic Advisors see for example Ambrose Evans-Pritchard: “Europe’s debtors must pawn their gold for Eurobond Redemption“, The Telegraph, May 29, 2012, http://www.telegraph.co.uk/finance/financialcrisis/9298180/Europes-debtors-must-pawn-their-gold-for-Eurobond-Redemption.html.

(5) See for instance footnote 3.

(6) http://www.ecb.int/press/pr/date/2009/html/pr090807.en.html

(7) Basel Committee on Banking Supervision, 2012, p. 22, Link: http://www.bis.org/publ/bcbs226.pdf

(8) http://www.corriere.it/opinioni/12_giugno_20/quadrio-curzio-prestiti-internazionali-facili_5d33752a-baaa-11e1-9945-4e6ccb7afcb5.shtml

(9) http://www.firstonline.info/a/2012/09/11/alberto-quadrio-curzio-usare-loro-come-collaterale/4097075e-c2ac-4bd4-9567-0d6877d3a1e0

(10) http://www.corriere.it/economia/12_giugno_26/fondo-immobili-societa-quotate-bot-vegas_31aeeb20-bfa8-11e1-8089-c2ba404235e2.shtml

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