Among the various remedies put forward to deal with the Euro sovereign debt crisis — restructuring, Greek and/or Portuguese exit from the Euro, the issuance of European backed bonds — one that has been barely mentioned is the sale of gold. True enough, it does not come close to offering a complete cure.Â With respect to two countries, though, the proceeds of such a sale could make something of a dent in their respective debt loads.
Take Italy first. It is ranked third among countries in terms of gold reserves. As of December 2010, it held 2,451.8 tons of gold.Â Doing the math (16 ounces per pound X 2,000 pound per ton X US$Â 1783 per ounce), Italy could garner US$ 139.8 billion for its gold reserves. Given Italy’s approximately trillion dollar economy, that would cut its public debt by about 7% of GDP. As its public debt is currently 118% of GDP, such a sale would bring that figure down to just north of 111%. Not much admittedly, but it would be a respectable start.
Portugal would be able to take a bigger swipe at its debt . For this, strangely enough, the small Iberian nation can credit Antonio Oliveira de Salazar, who was very focused on amassing gold reserves while ruling the country as a dictator from 1932 to 1968.Â As a result, Portugal has 421.6 tons of gold in reserve, now worthÂ US $24 billion. As the Portuguese state owes around US$ 200 billion to its creditors, a sale would bring down its public debt to GDP ratio by 12%, from 84% to 72%.
This would definitely calm bondholder nerves in the short-run, enough time at least to enable the country to implement reforms to address its structural weaknesses. The necessary reforms would basically entail a major diminution in the size and reach of government.
A more ideal solution, however, would be for Portugal to keep its gold, leave the Euro, bring back the old Escudo currency — but this time fully backed by gold.Â What an example that could set for the world!
But don’t expect this to be implemented anytime soon. If Italy and Portugal are going to do anything with all their gold, it will probably be to sell it.