If gold is collateral for their bailouts, nations may want a higher gold price

Section:

Europe's Debtors Must Pawn Their Gold for Eurobond Redemption

By Ambrose Evans-Pritchard
The Telegraph, London
Tuesday, May 29, 2012

http://www.telegraph.co.uk/finance/financialcrisis/9298180/Europes-debto...

Southern Europe's debtor states must pledge their gold reserves and national treasure as collateral under a E2.3 trillion stabilisation plan gaining momentum in Germany.

The German scheme -- known as the European Redemption Pact -- offers a form of "Eurobonds Lite" that can be squared with the German constitution and breaks the political logjam. It is a highly creative way out of the debt crisis, but is not a soft option for Italy, Spain, Portugal, and other states in trouble.

The plan is drafted by the German Council of Economic Experts and inspired by Alexander Hamilton's Sinking Fund in the United States -- created in 1790 to clean up the morass of debts left by the Revolutionary War. Flourishing Virginia was comparable to Germany today.

... Dispatch continues below ...



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Chancellor Angela Merkel shot down the proposals last November as "completely impossible," but Europe's crisis has since festered, and her Christian Democratic Party has since suffered crushing defeats in regional elections.

The Social Democrat opposition supports the idea. The Greens say they will block ratification of the EU Fiscal Compact in the German Bundesrat -- or upper house -- unless Mrs Merkel relents.

"The Redemption Pact cleverly combines the advantages of lower interest rates through joint European borrowing with a reduction of debt," says Green leader Jürgen Trittin. "Joint liability would be limited in both time and scale."

The plan splits the public debts of EMU states. Anything up to the Maastricht limit of 60 percent of GDP would remain sovereign. Anything over 60 percent would be transfered gradually into the redemption fund. This would be covered by joint bonds.

Italy would switch E958 billion, Germany E578 billion, France E498 billion, and so forth. The total was E2.326 trillion as of November but is rising fast as Europe's slump corrupts debt dynamics. The sinking fund would slowly retire debt over 20 years, using designated tithes akin to Germany's "Solidarity Surcharge."

In effect, Germany would share its credit card to slash debt costs for Italy, Spain, and others. Yet it is the exact opposition of fiscal union. While eurobonds are a federalising catalyst, the fund would be temporary and self-extinguishing. "The fund is a return to the discipline of Maastricht with sovereign control over budgets," said Dr Benjamin Weigert, the Council of Experts' general-secretary.

The ingenious design gets around the German constitutional court, which ruled in September that the budgetary powers of the Bundestag cannot be alienated to any EU body under the Basic Law -- the founding text of Germany’s vibrant post-War democracy.

The court warned that open-ended liabilities are unconstitutional. The Bundestag may not establish "permanent mechanisms which result in an assumption of liability for other states' voluntary decisions, especially if they have consequences whose impact is difficult to calculate," it ruled. Chief Justice Andreas Vosskuhle said that any major step towards EU fiscal union would require "a new constitution" and a referendum.

The fund implies a big sacrifice for Germany. Its interest costs on joint debt would be much higher than today's safe-haven rate of 1.37 percent on 10-year Bunds. Jefferies Fixed Income says it would cost 0.6 percent of German GDP annually. The Council of Experts -- or "Five Wise Men" -- argue that this would be modest compared to the growth adrenaline of rescusitating monetary union.

Yet it is not charity either. One official said a key motive is to relieve the European Central Bank of its duties as chief fire-fighter. "We have got to get the ECB out of the game of distributing money, and separate fiscal and monetary policy. Germany has only two votes on the ECB Council and has no way to control consolidation," he said.

Germany would have a lockhold over the fund, able to enforce discipline. Each state would have to pledge 20 percent of their debt as collateral. "The assets could be taken from the country's currency and gold reserves. The collateral nominated would be used only in the event that a country does not meet its payment obligations," the proposal said.

This demand could enflame opinion in Italy and Portugal. Both states have kept their bullion, resisting the rush to sell by Britain and others. Italy has 2,451 tonnes of gold, valued at E98 billion in March.

Alessandro di Carpegna Brivio, a gold expert at Camperio Sim in Milan, said Italy should treat such proposals with care. "Everything being done at a European level is in the interests of Germany and France, to save their banks. It is not in the interest of Italy," he said.

"We should use our gold to take care of our own debt, collateralizing bonds above 100 percent of GDP. That would be a far more targeted approach," he said.

David Marsh, author of books on the euro and the Bundesbank, said Germany is not yet ready for the redemption fund. "The Germans have to do something, but I don't think it will happen before the elections next year. Spain will have to go through storm first," he said.

Ultimately, a sinking fund cannot tackle the root cause of the eurozone crisis. It may cap debt costs but it does not alter the intra-EMU currency misalignment between North and South, or help the Latin states close the chasm in labour competitiveness.

The South would still face the long grind of "internal devaluation" -- or wage deflation -- breaking societies on the wheel. Yet the Redemption Pact is at least a first step back from Purgatory.

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Prophecy Platinum (TSXV:NKL) Announces Encouraging Rhodium, Ruthenium, Osmium,
Iridium Assays from WS11-188 of Wellgreen Project in Yukon Territory, Canada

Company Press Release
May 25, 2012

VANCOUVER, British Columbia, Canada -- Prophecy Platinum Corp. (TSX-V: NKL; OTC-QX: PNIKF; Frankfurt: P94P) is pleased to provide results of full spectrum 6E (Platinum, Palladian, Rhodium, Ruthenium, Osmium, and Iridium) analysis of platinum group elements on the first batch of samples from the company's wholly-owned Wellgreen PGM-Ni-Cu project in the Yukon Territory, Canada.

The company enlisted Activation Laboratories (Actlabs) of Ancaster, Ontario, to conduct a full-spectrum 6E analysis of samples taken from the 2011 drill hole WS11-188. Adding Rh, Ru, Os, and Ir to Pt and Pd increased the total PGE content (6E) by an average of 28 percent, based on a population of 90 samples, most of which are from disseminated sulphide-type mineralization.

Assay results with 6E exceeding 0.50 ppm (0.5 g/t) (excluding copper and gold assays) are tabulated at Prophecy's Internet site and are available with assay results from the entire batch of 90 samples here:

http://prophecyplat.com/news_2012_may25_prophecy_platinum_announces_rare...