Italy to use gold reserves to cut national debt

By Paul Bompard in Rome

Published: August 1 2007 09:41 | Last updated: August 1 2007 09:41

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 re-think at EU level the existing limitations 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’s 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 can not 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 €37,970m worth of gold and the equivalent of €21,026m 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 which 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 €2,500m.

“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.”