Gold News

Will Italy Have to Use Its Gold Bullion?

NEW PROPOSALS from the European Commission – the executive branch of the European Union – could lead to Eurozone nations posting Gold Bullion as collateral against its sovereign borrowing.

The proposals are contained the Commission's 'Green paper on the feasibility of introducing Stability Bonds'. Stability Bonds are the Commissions term for commonly-issued Eurozone sovereign debt instruments, commonly referred to as Eurobonds.

The Green Paper – which the Commission has published to "structure and better inform" the Eurobonds debate – proposes three options:

  1. Full substitution of all Eurozone members' bonds for common Stability Bonds
  2. Partial substitution, whereby Euro members would still fund some borrowing on an individual basis, with the rest jointly guaranteed by all members
  3. Partial substitution without the joint guarantee

To make the third option feasible, the Commission suggests several "credit enhancements" may be needed. These, it says, could include pledging Gold Bullion or other assets as partial collateral, as well as offering seniority over other debt.

"To  ensure that Stability Bonds would always be repaid, even in case of default, a number of credit enhancements could be considered by the Member States," the paper suggests.

"First, senior status could be applied to Stability Bond issuance. Second, Stability Bonds could be partially collateralised (e.g. using cash, gold, shares of public companies etc.). Third, specific revenue streams could be earmarked to cover debt servicing costs related to Stability Bonds. The result would be that the Stability Bonds would achieve an AAA rating, although the ratings on the national bonds of less credit-worthy Member States would be likely to experience a relative deterioration."

The paper adds that the majority of EU countries hold more Gold Bullion in their reserves than they require:

"Member States could provide collateral, such as cash, gold reserves which are largely in excess of needs in most EU countries, as well as earmarking specific tax receipts to servicing of Stability Bonds."

Italy, for example, has 2415.8 tonnes of Gold Bullion – worth around €100 billion – according to World Gold Council data. France meantime has Gold Bullion reserves totaling 2435.4 tonnes, while Spain and Belgium have over 200 tonnes each.

"It is my absolute view that in the next two years, you will see Italy use its gold to once again plug some of the holes in their budget, because they are going to have to," said Pierre Lassonde, chairman of Gold Mining company Franco-Nevada, said at September's London Bullion Market Association conference in Montreal.

Some commentators have long suspected that Italy might one day have to use its Gold Bullion reserves.

"Italy's gold probably will remain deep down in the vaults, unused but not unloved – ready for the day when, ultimately, it's needed."

There are, however, complications. Many Eurozone countries' Gold Bullion reserves are controlled not by their governments, but by their central banks. In 2009, Italy's government attempted make use of its countries Gold Bullion – with the Banca d'Italia refusing to comply.

In Germany meantime, Angela Merkel has continued to voice her opposition to the concept of Eurobonds – describing the Commission's Green paper "extremely worrying" and "inappropriate".

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