11/29/2011, 00.00
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IMF funds, sovereign debt and sovereignty

by Maurizio d'Orlando
The feeble denial of a possible IMF loan to Italy, a country caught in the maelstrom of a major international affair not of its making, appears to confirm rumours that we are moving towards new Special Drawing Rights (SDRs), with the gold of the Bank of Italy and the interests of world’s bank cartel at stake.
Milan (AsiaNews) – A bombshell hit readers of financial and macro-economic news over the weekend. Italian daily La Stampa [1] reported on Sunday that the International Monetary Fund (IMF) was preparing “a € 400-600 billion loan to the Monti government for the next 12 to 18 months to implement necessary reforms without having to refinance the debt.”

Ostensibly, the report appears to be only about Italy. In reality, the country is caught up in the maelstrom of a major international affair not of its making, a fact clearly evinced, among other things, by China’s rising interest in European sovereign debt, especially Italy’s.

According to the IMF proposal, Italy’s would carry an interest of 4 to 5 per cent, less than the 7-8 per cent established in recent sales of Italian government bonds. Still, the size of the loan is huge. As the La Stampa journalist and other sources point out, the IMF does not have that kind of money to lend. For the journalist, under the circumstances the IMF might issue new Special Drawing Rights (SDRs), in coordination with the European Central Bank (ECB), which is led by Mario Draghi. Seemingly, the plan is in an advance stage and has been recently discussed by Italian Prime Minister Mario Monti and the new IMF director, Christine Lagarde.

An unidentified spokesperson for the IMF denied the report Monday morning. Yet Molinari, the journalist who penned his name to the article, is known for his access to top financial circles and for the accuracy of his reporting. The denial thus has raised more questions than provided answers and appears to be a feeble attempt to counter the effect of prematurely leaked information.

If it proves to be true, it would clearly confirm what AsiaNews reported in September [2]. Although modesty would dictate otherwise, as this author wrote recently, it appears that the crisis had been in the making for sometimes. “At this point one has to insert a twist, a reversal of fortunes: the Federal Reserve announces that, together with the International Monetary Fund, it will intervene to save the Euro, provided that the European countries do their part. It's a brilliant move, the world stock markets recover, apparently, and the riots cease. Berlusconi, however, must go away, at any rate, because so it is written in the script.”

What allowed us to foresee developments was not a crystal ball (which we do not have) but the speciousness of the attack against Italy’s public debt. The latter has been hovering around the 120 per cent mark for the past 20 years, but rating agencies, and gaggles of smart money managers, appear to have discovered it only in the past few months.

The feeble denial of the report is worrisome because the article noted that the IMF and the ECB do not have enough reserves for such a loan to Italy. Since the United States, Europe and Japan are strapped for cash, and emerging nations with deep pockets—China, India and Brazil—appear unwilling to depart easily from their money, where would it all come from? From the Bank of Italy, which, in addition to issuing banknotes, also holds 2,500 tonnes of gold [3].

In July 2009, then Finance Minister Giulio Tremonti told an Italian parliamentary committee that the gold belonged to the people of Italy, to the support on both government and opposition benches.

As one expect, private banks took a dim view of that, on the belief that the gold belonged to the Bank of Italy. Such earnest defence of the bank is not surprising; after all, the Bank of Italy supervises the country’s private banks and financial institutions. For their part, private banks and insurance companies own 94.33 per cent of the Bank of Italy.

After the Italian government was taken over by technocrats and Italy was placed under temporary receivership, Tremonti was replaced by Corrado Passera at the helm of a super Economy Ministry.

Until recently, the new minister was the managing director of Banca Intesa, answerable to bank shareholders. That bank also happens to hold the largest block of shares in the Bank of Italy. Shareas in Banca Intesa have been trading downward in recent weeks because it holds a large quantity of Italian treasury bills (BOT) and treasury notes and bonds (BTP).

Recent sales of Italian government bonds have been dismal. Financial markets, and the money managers with huge amounts of capital that run them, have been spooked, and are increasingly reticent to buy Italian bonds, in response to what those in the know say. As a result, interest rates have jumped.

As the rise in interest rates depreciated the value of older bonds bought at a lower rate, Banca Intesa saw the value of its own assets drop. Hence, the value of the shares of the bank of which Passera was CEO until a few days ago also declined. If Passera, as Italy’s new Finance minister, hands over Italian gold, the bank would get enough liquidity to avoid the need of refinancing. The value of BOT and BTP would also bounce back. The same would happen to bank shares, especially those of Banca Intesa. Since the remuneration and severance pay of the managing director of a big bank closely reflects bonuses based on share value, it is hard not to see the conflict of interest and confusion of the roles between controller and controlled.

Anyone who thinks that it is in Italy’s interest to unload some of its gold, the answer is: Think again! According to the World Gold Council, the world’s central banks hold some 30,708.3 tonnes of gold [4] as of November 2010. Italy holds the fourth largest gold reserves in the world after the United States (8,133.5 tonnes), Germany (3,401 tonnes) and the IMF (2,814.0 tonnes). Italian gold reserves represent 7.98 per cent of the total, whilst its economy constitutes 3.35 per cent of the world economy according to World Bank figures (as of 31 December 2010).

If we use a restrictive notion of currency, the M2 [5], the volume of monetary liquidity in the world is equal to 120.6 per cent of world GDP [6], or US$ 73.510 trillion. If we use a broader (and more accurate) definition of financial liquidity to include credit (bank money) and public debt, we arrive at more than US$ 150 trillion [7]. According to the World Gold Council, all the gold dug out of the ground since the start of history amounts to about 165,600 tonnes [8].

What follows is a simple table [9]. It indicates the value of a gram of gold in dollars. The best comparison would be the ratio between M2 and total gold reserves in central banks, i.e. US$ 2,450 per gram against the current rate, which hovers around US$ 55 per gram. Of course, all this is purely theoretical based on a 1 to 1 ratio, namely that for each unit of currency there is corresponding gold coverage for 100 per cent of value.

M2/gold reserves $ 2,450
liquidity /gold reserves $ 5,000
liquidity /total gold $ 906
M2/total gold $ 444

If we use another point of comparison, we would see how it would be to the advantage of the world’s bank cartel but not to ordinary Italians.

In August 1982, the Dow Jones Industrial Average (DJIA) was under 780 points and gold was US$ 350 per ounce. Today, the DJIA is around 11,600—that is a 15-fold increase. Applying the same multiplier, gold would be at US$ 5,250 per ounce or US$ 168 per gram, three times its current value.

However you slice it, the long-term value of Italy’s 2,451.8 tonnes of gold would be much greater. If we apply the derived value of the M2/gold reserves ratio (US$ 2,450 per gram), we come up with € 4.4 trillions, a figure far greater than Italy’s total public debt, which currently stands at € 1.85 trillion.

Still, if we consider the tough conditions the IMF would impose to extend such a loan, Italy would not be able to sell its T-bills and bonds. In fact, one of the conditions the IMF requires when extending loans is that it comes before all other creditors. Under such circumstances, no investor is likely to put fresh money in subordinated bonds. Italy would thus de facto lose its sovereignty.

Last but not least, if this could be done to a country with a well-established industrial tradition, what could happen to less established nations?

[1] See Maurizio Molinari, “E l'Fmi prepara una cura da 600 miliardi per l'Italia,” (The IMF is preparing a 600 billion treatment for Italy), in La Stampa, 27 November 2011.
[2] Maurizio of Orlando, “Economic Crisis: a controlled demolition,” in AsiaNews, 20 September 2011.
[3] The exact amount is 2,451.8 tonnes, most of which is unfortunately stored outside of Italy, in Washington and London.
[4] See World Gold Council, World Official Gold Holdings, data as of November 2011, consulted on 29 November 2011.
[5] Money and quasi money (M2)
[6] See World Bank, ‘Money and quasi money (M2) as % of GDP', consulted on 29 November 2011.
[7] See A world of possible futures, consulted on 29 November 2011.
[8] See the World Gold Council, “Investment FAQs”, consulted on 29 November 2011.
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