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Ambrose Evans-Pritchard: Italy should use gold reserves to change EMU policy
By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, May 2, 2013
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100024392/it...
The World Gold Council has advised Italy to deploy its 2,000 tonnes of gold to break free of European Monetary Union austerity dictates.
By using the reserves -- the world's fourth largest -- to collateralise the first chunk of any losses for bondholders, Italy could raise E400 billion or so on the capital markets and determine its own future for a while.
Italy did this in 1974 when it borrowed $2 billion from the Bundesbank, using gold as collateral.
Portugal did the same thing to borrow $1 billion from the Bank for International Settlements in the 1975-1977, and India used its gold to borrow from Japan in 1991.
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A joint WGC-Ipsos survey found that 61 percent of Italian business leaders and 52 percent of the public would support the idea, with only a small minority opposed.
The report said:
"With Italy still facing significant financial challenges, national assets -- such as gold reserves -- present an opportunity to buy some vital breathing space.
"Gold-backed sovereign debt, or 'gold-backed bonds,' is issued debt that is underpinned by gold collateral. By using a portion of their gold reserves in this way, sovereign states could borrow more cheaply, without selling an ounce.
"This use of gold would help sovereign governments to regain the confidence of the bond markets and lower funding costs. Nations could raise between four and five times the value of their gold reserves -- a bond 20 percent collateralised by gold could raise around 80 percent of Italy's two-year refinancing needs.
"This would buy time for growth to take hold. It would lower sovereign debt yields without increasing inflation and would give Italy time and resources to work on economic reform and recovery. Using gold for the purposes of sovereign debt issuance would allow greater flexibility beyond austerity."
This is exactly the sort of thinking that is needed in the occupied EMU states, and Italy has been under occupation since the ECB effectively toppled the elected the government in the coup d'etat of November 2011 -- with the active collusion of President Napolitano, a former Stalinist who later transferred his ideological mania to the EU Project.
Such a plan has been proposed by Alessandro di Carpegna Brivio at Camperio Sim.
However, it would require the new premier, Enrico Letta, to tell Europe to jump in the lake, since "reflation in one country" would violate the EMU club rules.
Mr Letta is highly unlikely to do so. He is a child of the EU Project -- literally, since he grew up in Strasbourg. He formed his views in the entourage of Prodi and Andreotti.
His drive for growth is as meaningless as Hollande's vow to relaunch growth in France. Hollande in fact did the opposite. He is tightening fiscal policy by 2 percent of GDP this year in a counter-cyclical fashion, during a recession, because he is so steeped in EU insiderism that he cannot bring himself to say boo to the pedants in Brussels and Frankfurt (though some members of the Socialist Party clearly can).
My worry is that the World Gold Council plan would merely prop up the unworkable EMU structure for longer, and then leave Italy even more vulnerable, having played its last card.
It would not resolve the fundamental problem, which is that Italy has lost unit labour competitiveness steadily for 15 years. To try to claw this back with an "internal devaluation" is very destructive and would test social cohesion to breaking point.
What Italy should do is to tell Germany that it will no longer participate in EMU unless the North reflates with an "internal revaluation" to close part of the gap. It should deploy its gold reserves to make this threat more credible.
Germany would know that Italy has the means to stabilise the Italian bond market after liberation. Italy is perfectly capable of doing this -- and in my opinion would benefit -- since it has a primary budget surplus of 2.5 percent of GDP and would not face a funding crisis.
It would then be a matter of whether Germany has more to gain or lose by allowing such an even unfold.
Let the Holy Roman Emperor come to Canossa.
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