Selling Italian reserves to close debt would be just 'a drop in the sea'


8:30a ET Wednesday, August 1, 2007

Dear Friend of GATA and Gold:

Note the comment by the Urbino University economist in this Financial Times story about the Italian government's plan to sell gold in the name of reducing the national debt. This, the economist says, will have the impact of "a drop in the sea," and more likely the revenue from gold sales will cover only some debt service in the short term.

That suggests that the purpose of the gold sales is something else -- like suppressing the gold price or at least scaring the gold market.

Could the central bankers themselves be scared?

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Italy to Use Gold Reserves to Cut National Debt

By Paul Bompard
Financial Times, London
Wednesday, August 1, 2007

ROME -- Part of the gold and currency reserves of the Bank of Italy will be used to attack Italy's enormous national debt, currently the equivalent of 107 per cent of GNP, according to a resolution approved by parliament on Tuesday as part of Romano Prodi's coalition government's "Document of Economic and Financial Programming" for 2008-2011, the basis for the 2008 budget legislation which must be approved within 2007.

The resolution commits the government to "undertake, also in its relations with the European Union, a survey of all instruments useful to producing a significant reduction of the national debt, through agreed ways of using the reserves of the central banks, in gold and currency, in excess of that required by the agreement with the ECB for the defence of the euro."

The wording suggests that Italy's government would try to rethink at EU level the existing limits on the use of the gold and currency reserves of Europe's central banks.

Italy is following in the footsteps of France, Holland, and Germany, all of which in recent years have sold some of their central bank gold. The Bank of Italy has not commented officially yet, but there might be complications involving the independence of the central bank as established by the EU. Italy's government cannot unilaterally infringe the central bank's independence and autonomy, although the bank could freely agree to contribute some of its reserves.

The Bank of Italy has E37,970 million worth of gold and the equivalent of E21,026 million in foreign currency, mostly US dollars and sterling, with smaller amounts in yen and Swiss francs. Some of this, however, under an agreement with the ECB, must be retained in case there is a need to intervene to defend the euro.

In addition, a pact by 15 European nations sets a total limit of 500 tonnes of gold that can be sold in any one year. For 2008 the sale of 345 tonnes has already been reserved by other central banks. This would leave only 155 tonnes for Italy to sell, the equivalent of about E2,500 million.

"Obviously this is a drop in the sea," commented economist Mario Pianta of Urbino University. "But what I believe the government has in mind is to use this money for servicing the debt during 2008. With interest rates that could rise further, this is something that the Italian government is very worried about."

Professor Pianta also said that "the very idea of having gold reserves is left over from the 19th century. In practice a currency as strong as the euro has no need for gold reserves, which could be better used as investments to further strengthen Europe's economy."

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