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IMF talks about selling gold again

Section: Daily Dispatches

By Christopher Swann
Bloomberg News Service
Wednesday, November 22, 2006

SINGAPORE -- The International Monetary Fund, the world's third-largest owner of gold, should sell some of its hoard to cover projected operating losses, say a growing number of the fund's executive directors.

The Washington-based lender predicts it will lose $87.5 million next year and $280 million in 2009. Some directors say the fund should sell a portion of its 103 million ounces of gold, valued at $64.7 billion, and invest the proceeds in interest- bearing assets.

"We would support the use of fund gold as part of the solution to IMF financial needs," Tuomas Saarenheimo of Finland, chairman of a group that coordinates the position of European Union members on the fund's 24-person board, said in an interview in Washington.

The prospect of gold sales highlights the financial crunch faced by the fund as countries such as Uruguay repay loans early, reducing the fund's interest income, and demand for fresh credit ebbs. Proponents must overcome opposition from the U.S., the world's third-largest producer and the biggest owner, which wants to keep gold prices high.

"Large gold holders and producers like the U.S. have been worried that IMF sales would drive down the gold price," said Ted Truman, a former U.S. Treasury assistant secretary and a scholar at the Peterson Institute for International Economics in Washington.

Brookly McLaughlin, a spokeswoman for the Treasury Department, said sales aren't "the appropriate option at this time for dealing with funding issues at the IMF." She declined to elaborate.

Rather than sell gold, the IMF should rein in an annual budget that has doubled to $980 million in the past decade, said Devesh Kapur, an economist at the University of Pennsylvania in Philadelphia.

"Costs at the fund have been allowed to get out of control," said Kapur. "It now has a far bigger staff and budget than its role justifies."

A sale of gold is among the options before an eight-person panel on IMF finances appointed in May by Managing Director Rodrigo de Rato. The panel, whose members include former Federal Reserve Chairman Alan Greenspan, is to submit its report early next year. Other solutions include cutting expenses and asking member states to make contributions.

Jeroen Kremers, the executive director from the Netherlands, said limited gold sales are preferable to seeking handouts.

"Becoming dependent on member states for annual budget contributions would seriously undermine the IMF's independence and thus its ability to fulfill its role in the world financial system," Kremers said in an interview in Washington.

Created at the end of World War II to promote global financial stability, the fund uses capital contributed by members to lend to governments in crisis. It pays its staff and covers costs from interest earned.

Following bailouts in Mexico and Asia in the 1990s, demand for IMF loans has waned, in part because governments are reluctant to fulfill requirements such as spending cuts and sales of government assets.

The IMF has sold gold before. The most recent sales took place between 1976 and 1980, when the fund unloaded 50 million ounces following an international agreement to reduce the role of the metal in the global monetary system.

Support for fresh sales is building. Six directors representing 39 countries said they are in favor, while a seventh declined to comment. Finland and other Nordic nations, which opposed an unsuccessful 2005 plan to sell gold to fund debt relief for poor nations, now back sales.

One director who declined to be identified said gold sales would win the necessary 85 percent of votes of IMF members if U.S. opposition could be overcome. The U.S. has a 17 percent voting share in the fund, giving it a veto.

Expenses have risen as the fund embraced new roles such as surveillance of international money laundering. Staff has mushroomed to 2,700 from 1,800 in 1990.

Lending is the lowest in 25 years, with a single borrower, Turkey, now accounting for more than 80 percent of the fund's $12.2 billion in loans. The second-largest borrower, Uruguay, this month said it would repay $1.1 billion ahead of time.

"It's hard to imagine a solution to the IMF's financial problems without gold sales," said Eduardo Loyo, the director from Brazil.

The IMF finance department in February recommended selling 11 million ounces of gold, or about 11 percent of its stockpile. With gold at $627.70 an ounce in New York late yesterday, more than double the price in April 2002, that would raise $6.9 billion.

John Lipsky, the second-ranking IMF official, said selling gold is a decision for member countries. "Gold sales could mean a lot of different things, and do not imply one course of action," he said in an interview this month during a trip to Africa, without elaborating.

Finland's Saarenheimo said the IMF may be able to overcome U.S. objections by selling gold to central banks, which would avoid driving down the price. The IMF could also sell over a period of years and convince central banks to control their own sales.

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