A return to the gold standard as a glittering prospect for providing collateral for easing the Eurozone debt crisis, suggests the World Gold Council.
The WGC proposes that Eurozone countries holding significant gold reserves relative to the short-term funding needs could consider putting up their reserves as security for sovereign debt aid.
Portugal and Italy are singled as as the nations that could benefit most from the proposal as both have gold reserves that exceed 20% of their funding requirement over the next two years.
Gold is the ideal solution, says the WGC, because precious metal is neither held by the European Central Bank to manage the Euro nor as a collective asset of the single currency nations.
Both Italy and Portugal have national central banks with the gold as sovereign deposits, and should all or part of the reserves be sold, the governments would benefit from the income, not the Eurozone.
Central banks with significant gold holdings
“There are many potential routes by which this gold could be transferred from the central banks to their governments,” says the WGC. “For instance, the Bank of Portugal could pay a dividend to the Portuguese government in gold, or the Italian government could buy gold from the Banca d’Italia at the prevailing market price, with the profits going immediately to the government.
“Both countries could use the gold to back sovereign bond issuance.”
The WGC argues that the proposal circumvents the problem of other countries within the single currency zone have to contribute to the economies of other countries via the European Central Bank.
As the gold belongs to a specific nation, the money generated from the gold does as well – and that means no other nation has to become involved in the transaction.
Market failure issues
The other attraction for Italy and Portugal is raising the money with gold as security means no loss of face or sovereignty within the Eurozone, as the nations are not bowing to external pressures to run their economies under conditions set by outsiders.
“We have seen that Italy and Portugal have a considerable amount of gold available in their national central banks that could act as collateral for new sovereign debt issuance,” said the WGC. “Unlike monetary financing of sovereign debt, using gold would not create fiscal transfers between Eurozone members or any long-term inflation risk.
“It could address market failure issues at which European Central Bank policies are directed, but without the drawbacks that make those policies so controversial.”
