Montag, 21. Januar 2013

Gold-backed bonds offer an alternative to austerity. By Ansgar Belke

Here is the idea: Those Eurozone Member States worst affected by the sovereign debt crisis, with sufficient gold reserves, could use their gold as collateral to reduce debt servicing costs. Gold-backed sovereign debt or a ‘gold-backed bond’ is debt, which is partially secured by gold. Using a portion of a nation’s gold reserves in this way would be a temporary step to recovery for Eurozone Member States, enabling them to borrow more cheaply through bridge-financing.

Using gold as collateral for new sovereign debt issues would alleviate some pressure in the short term and facilitate a return to growth. Gold-backed bonds would have an advantage over the existing non-conventional monetary policy tools, such as Outright Monetary Transactions (OMT), introduced by the European Central Bank (ECB) to tackle the Eurozone debt crisis to date. The ECB’s balance sheet would be largely unaffected in the end, as the gold that sits within national central bank reserves would be more than sufficient to collateralise the bonds. It would lower sovereign debt yields without increasing inflation and would give some of the Eurozone’s most distressed countries additional time to work on economic reform and recovery.

To be sure: Not all Eurozone countries have enough gold in their reserves for this to be a viable solution. However, for those with significant holdings, relative to their short-term financing requirements, such as Italy and Portugal, this represents a real alternative. Italy and Portugal hold gold reserves of 24 and 30 per cent of their two year funding requirements respectively. In the case of Portugal, for instance, a sovereign bond backed by one-third gold could reduce yields on sovereign debt by around one third.

While there are clearly important political and legal considerations that need to be addressed, gold has been used in the past to secure loans in Portugal, Italy and India and such a measure would certainly offer a partial solution to Europe’s current woes and an alternative to austerity measures.

For more on my proposal see this interview with Asia Times, this report in the Wall Street Journal, Interview with FAZ

Professor Belke is a Monetary Expert Panellist for the Economic and Monetary Affairs
Committee of the European Parliament and is the Jean Monnet Professor at the
University of Duisburg-Essen.He is also a member of Open Europe Berlin's Advisory Council.

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