Saturday, September 3, 2011
Dundee Wealth Economics cheif economist, Martin Murenbeeld, takes a look at the possibility of a bank collapse in Europe, fiscal policy going forward and why a return to a gold standard is unlikely........listen here
LONDON | Fri Sep 2, 2011 7:28am EDT
(Reuters) - Europe's most indebted nations are under heavy pressure from their richer neighbours to sort out their finances, but they are unlikely to mimic the impoverished gentlefolk of old by selling off the family silver -- or in their case, gold -- to do so.
More than 750 tonnes of gold are currently sitting in the state coffers of Portugal, Greece and Spain alone, equal to about 17 percent of the 2010 annual supply of bullion from mining and sales of scrap.
Despite struggling with massive debt burdens and in some cases accepting multi-billion-euro bailout packages, the so-called PIIGS -- the countries above, plus Ireland and Italy -- have not dipped into their gold reserves to service that debt.
At a time when gold prices have rallied to record highs near $2,000 an ounce, this has raised eyebrows elsewhere in Europe.
Senior German lawmaker Michael Fuchs, deputy leader of Chancellor Angela Merkel's Christian Democrats, said earlier this month that Italy should sell its gold reserves to avoid taking on new borrowing.
And back in May, German politician Frank Schaeffler told Bild newspaper that Portugal should sell its assets. "Before risking other people's money, Portugal should first sell its family jewels, especially its gold reserves," he said.
But these demands ignore the fact that this gold is not the property of the PIIGS' governments to sell.
"Foreign exchange reserves are held and managed by central banks, not by governments," said Natalie Dempster, director of government affairs at the World Gold Council. "Forex reserves are set aside for specific purposes - defence of currency, payment of external debt obligations and payment of imports."
"In the past you could have had incidences where governments might try to overstimulate their economies by running exceptionally loose monetary policy before an election," she said. "That is a reason why it is critical, in an advanced economy, that central banks are independent."
Two years ago the Italian government's proposal to tax the unrealised gains on its gold reserves was promptly slapped down by the European Central Bank, which issued a legal opinion to block the plan in July 2009.
The ECB said the move could violate a ban on using central bank resources to finance the public sector, risked breaching the Bank of Italy's independence and threatened to weaken the country's finances.
GOLD VALUE DWARFED
And while gold prices are at record highs, the gold market is still dwarfed by the size of Europe's debts.
Between them Portugal, Ireland, Italy, Greece and Spain hold some 3,233 tonnes of gold, worth some 132 billion euros (117 billion pounds). Their combined outstanding public debt, according to estimates from the IMF, is around 3,289 billion euros.......read on