Does anyone remember “giscards”? They were French government bonds issued in 1973, named after president of the day Valéry Giscard d’Estaing and linked to the price of gold. They were so well known they feature in both Liar’s Poker and Bonfire of the Vanities, those classic accounts of 1980s financial market excess (one fictional, the other not). The problem was that France had issued the bonds when gold (according to Liar’s Poker) was $32 an ounce, and was having to redeem them when it hit $500.
If they haven’t read these books, the eurozone’s central bankers should order them. Cyprus may sell up to €400m of its gold reserves to help fund its €23bn bailout. That raises the intriguing question of whether other eurozone countries in trouble could, and should, do the same. The World Gold Council says there are nearly 11,000 tonnes of gold in eurozone vaults, with more than 3,300 in Germany. Two countries in financial straits – Italy and Portugal – have 2,451 tonnes and 382 tonnes respectively. With gold at €1,186 an ounce, Portugal’s hoard is worth €14.5bn, about a fifth the cost of its 2011 bailout.
This is where things get complicated. For starters gold is usually owned by central banks, which are forbidden under eurozone fiscal rules from directly financing their governments. This could be fudged if the gold were transferred to a separate authority – say the debt management office. In reality, of course, any sale by Cyprus would raise only a pittance. Even Italy’s hoard, worth nearly €100bn, is barely 5 per cent of its total debt.
The WGC argues that reserves should be used as collateral for bond issues. That would allow Italy to raise more than €450bn if it issued bonds that were 20 per cent collateralised by gold. There are obstacles here too. One is that the interest rate on those bonds may not be sufficiently lower than would otherwise by the case. Another is that governments issuing gold-backed bonds would have to offer credible guarantees that their gold was at the disposal of international creditors – that it was sitting in foreign vaults, probably under foreign law, in other words.
The collateral idea has historical precedent, ironically involving Italy and Portugal (among others) in the 1970s, for short-term financing. It may be too problematic legally and politically, and too limited in its financial impact, to be a long-term solution. Given the duration of the eurozone crisis, however, there may yet be an important role for the gold in them thar vaults.
Email the Lex team in confidence at email@example.com
Get alerts on Cyprus bailout when a new story is published