A senior economist is urging the Cyprus government not to sell its gold reserves, with the 10 tonnes up for sale expected to fetch some 400 mln euros to be better utilised to launch a gold-backed bond.
The government is pondering whether to sell most of its reserves, which, supposedly is the property of the European Central Bank, in order to help reduce its debt to the troika of international lenders.
In his opening statement in a position paper on gold-backed sovereign debt as a more effective Euro area monetary policy, Dr. Ansgar Belke of the University of Duisburg-Essen and member of the Monetary Expert Panel in the European Parliament, writes that “using gold as collateral for highly distressed bonds would bring great benefits to the euro area in terms of reduced financing costs and bridge-financing.”
Prof. Belke, who was in Nicosia after addressing an Economist expert panel discussion in Athens on Monday, said that Cyprus should not get into a hostile relationship with the local central bank, as it would need the European System of Central Banks’ agreement to the temporary transfer of the ‘national’ gold to an independent debt agency.
Although the money is literally a drop in the ocean compared to the 23 bln that Cyprus needs to bailout out the banks, replenish state coffers, pay civil servants and rollover sovereign debt, Belke agrees that it would help Cyprus regain its credibility in the international markets from which it has been excluded for 18 months.
“Gold has been used as collateral in the past and a gold-back bond might work and it could lower yields in the context of the euro crisis,” he wrote in the paper.
“There is by and large no transfer of credit risk between high/low risk countries, losses are borne by specific countries and not by the largest shareholder of the ECB, it would turn out to be more transparent, it would not be inflationary and would foster reforms.”
Belke added that in the case of Italy, one of the biggest gold holders in the world and bond holder in Europe, the Outright Monetary Transaction (OMTs) favoured by ECB chairman Draghi covered some 24% of its two-year refinancing needs and 30% of Portugal’s.
“So, do we go for a compromise or a Eurobond,” asked Belke, adding that the Cyprus experience has given new meaning to the concept of a banking union, as championed by the northern Euro area members Germany, the Scandinavians and even France.
“Cyprus made a mistake of putting all its eggs in one basket, but Cyprus was fortunate not to be connected to other markets, hence there was no contagion, nor was there a bank run.”
In any case, after the Cyprus issue, the whole argument to defend small depositors and calming the fears of German taxpayers seems to have been resolved, Belke said.
