Italy "Could Use Gold Bullion as Alternative to Austerity"

A SMALL majority of Italians would favor using the country's gold bullion reserves to ease the national debt burden, according to a new report from the World Gold Council, the market development organization for the gold market.

Citing the results of an Ipsos-MORI survey of individuals and Italian business leaders conducted in March, the WGC reports that "52% of Italians and 61% of business leaders would endorse using, but not selling" Italy's gold as a way of lowering the debt burden and helping to spur economic growth.

The report, entitled 'Italy considers gold as an alternative to austerity', adds that only 4% of survey respondents would support an outright sale of gold bullion.

"One option is to consider using the gold as a security for new sovereign debt issuance," the new report says.

"Independent research shows this approach can raise between four and five times the sales value of the gold reserves, while lowering the yield [the interest rate Italy pays to borrow] by up to several percentage points."

Last October the WGC commissioned research from consultancy Europe Economics that concluded gold could be used as collateral in such a way, while a paper published by Professor Ansgar Belke in November reached similar conclusions.

"Gold's lack of credit risk and counter cyclical tendencies makes it an ideal asset to be used as collateral...a bond 20% collateralized by gold could raise over 80% of Italy's two year refinancing needs," the latest WGC reports says.

"This would provide Italy with critical breathing space to build its recovery to create a more permanent solution."

When the two pieces of research cited above were published, gold in Euros was trading above €1300 an ounce. Last month however it dipped to a low of €1050 an ounce by afternoon London Fix prices, 24% down on last October's all-time high.

Italy is one of a number of countries that have used gold to collateralize bonds.

"Italy... received a $2 billion bail-out from [Germany's] Bundesbank in 1974 when it put up its gold as collateral," the WGC report notes.

"Portugal raised around $1 billion during the 1975-77 financial crisis from the BIS [Bank for International Settlements], Bundesbank and Swiss National Bank, the bulk of which was secured by pledging a proportion of the country's gold reserves. Most recently, in 1991 India used its gold as collateral for a loan with the Bank of Japan and others."