Tags: Guardian | Gold | Bonds | Eurozone

UK Guardian: Gold-Backed Bonds May Save Eurozone

By Michael Kling   |   Friday, 18 Nov 2011 01:35 PM

Bonds backed by gold can let troubled eurozone countries to leave the euro, devalue their new currencies, and protect the rest of Europe from the debt contagion.

That solution of using gold as the asset of last resort is staring eurozone leaders in the face, argues author Neil Behrmann in a blog for the U.K.-based Guardian newspaper.

The security of gold would encourage investors to purchase bonds. Both European and international investors would "snap them up," predicts Behrmann.

The troubled countries would free themselves from oppressive austerity measures and would be able to grow their economies again, he wrote.

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Both eurozone countries and the European Financial Stability Facility (the bailout fund) can use gold to back new bond issues.

Fortunately, central banks in the eurozone still have plenty of the valuable metal – 347 million ounces worth 447 billion euros ($605 billion), which is more than what the bailout fund now has.

Countries like South Africa, Uruguay and Portugal have successfully used gold-backed bonds in the past. South Africa exchanged 5 million ounces of gold collateral for foreign exchange in 1981 and 1982. Brazil, Uruguay and Portugal sold or swapped gold to raise money in the late 1970s and early 1980s. France also issued bonds indexed to the price of gold in the early 1970s.

Major holders of gold around the world, including the US and the European Central Bank, chip in to form a new institution that would harmonize the rescue effort, he suggests. The new fund would issue the gold-backed bonds to European nations in danger of defaulting.

Some may say the strategy can generate inflation, but the Federal Reserve and ECB have already been using a loose money policy since 2008.

European leaders disagree over how to solve the crisis. French President Nicolas Sarkozy has urged the ECB to act as the lender of last resort and pledge to purchase all the sovereign bonds needed to keep the bond yields in check. But German Chancellor Angela Merkel rejected that approach out of fears of creating inflation.

British Prime Minister David Cameron pressed for fast and decisive action to resolve the crisis but Merkel said she prefers a more step-by-step approach.

"It's obvious that we don't agree on every aspect of European policy, but we can address and accommodate and deal with these differences," Cameron said at a news conference, according to Reuters.

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Bonds backed by gold can let troubled eurozone countries to leave the euro, devalue their new currencies, and protect the rest of Europe from the debt contagion. That solution of using gold as the asset of last resort is staring eurozone leaders in the face, argues author...
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