By purchasing bonds from Bayer, the ECB has
indirectly facilitated the takeover of Monsanto which was finally
approved two weeks ago.
By Stan Jourdan and Graham Caswell.
When Reuters wrote
back in May that in theory the ECB could buy debt issued by Bayer,
which said on Monday it would finance its cash bid for Monsanto with a
combination of debt and equity, we thought it would only be a
theoretical case. We hoped the ECB would not dare actually do that.
Unfortunately, this turned out to be a very real situation.
According to the list of bonds purchased by the ECB (operationally by
the German Bundesbank) under its quantitative easing programme, the ECB
reveals clearly that it purchased a number of bonds issued by Bayer AG
and its affiliate, Bayer Capital Corporation B.V. The ECB does not
disclose the amount of bonds it holds. Those bonds' rates are extremely
low, a little more than 1 percent. Those low rates are clearly a
consequence of the ECB's intervention in the corporate bonds markets. To
sum up, there are two ways the ECB is helping Bayer to achieve the
Monsanto takeover:
(1) It bought bonds directly from Bayer.
(2) By purchasing corporate bonds massively on the markets, it is
pushing down rates for large corporations, hence lowering borrowing
costs on other bonds that are not necessarily owned by the ECB.
To be fair, Bayer will still need much more than the ECB's
contribution under QE to complete its €59 billion takeover (Bayer also
plans to issue more equity in the coming years). However it's clear that
the ECB did lend to Bayer, although it will not say how much.
As we predicted in July,
the ECB is making access to finance even cheaper for big corporations,
and is encouraging corporate concentration over the development of SMEs.
But for what purpose? There is little evidence that the Monsanto-Bayer
deal will create more wealth, or more jobs, or will generally contribute
to the well being of European citizens.
In fact, as the European Parliament controversially debated recently,
Monsanto is precisely feared and denounced by a large number of NGOs
for selling harmful products for humans and the environment. Following
the merger Bayer-Monsanto will supply roughly a quarter of the world's
seed and pesticide market, thus reinforcing further the market
concentration.
The Bayer-Monsanto deal is just one example of cheap ECB money
encouraging corporate concentration over the development of SMEs, and a
further example of the the absurdity of the logic behind the ECB's
quantitative easing programme. The ECB is basically helping big
companies by lowering their borrowing costs, hoping to make those
investments unprofitable for investors so that they will then turn their
money onto SMEs. This is nothing less than an old-school top-down
approach. It is 'trickle-down' economics at its worse.
On Monday, pressed to justify the ECB's corporate bond buying
programme by MEP Ernest Urtasun, Mario Draghi declared: “the argument
that this would support large corporates. And therefore, and therefore
what? Does this deprive the small corporates? That's the key question.
(...) Large corporates receive support from our corporate programme and
free space in the banks' balance sheet for supporting SMEs.”'
The assumption underlying Draghi's defense of corporate QE is that
the corporates would have borrowed anyways. What this assumption ignores
is that the availability of QE money is changing corporate behavior in
the direction of mergers and acquisitions. The ECB's corporate QE is
already accounting for over half of net issuance from ECB-eligible
companies (and rising rapidly) and mergers and acquisitions are
currently the biggest contributing factor to the growth of credit
lending in the euro area. In other words, corporate QE is clearly
distorting the market in favour of non-productive financial operations.
By reversing its logic and directing its QE directly to people and/or
sustainable investment, the ECB has an opportunity to improve the
efficiency of its policy, while contributing more tangibly to the
development of the Eurozone economy and the wellbeing of European
citizens. It should start looking into alternative options now.
How can bankers live with
themselves after the destruction wrought by their industry? That’s in
part what the Dutch journalist Joris Luyendijk sets out to uncover in
his new book, Among the Bankers: A Journey Into the Heart of Finance, which was published overseas last year under the title Swimming with Sharks.
The book attempts to lay bare not the technical workings of a very
opaque industry, but the emotional and moral considerations of those who
operate within it.
Luyendijk, a reporter at The Guardian who
has a background in anthropology, poses that question of conscience
over and over again. To answer it, he conducted hundreds of interviews
with people who work in the City, London’s version of Wall Street.
Early
on, Luyendijk finds out that despite an unwritten code of silence,
bankers are eager to talk about their jobs once promised anonymity. They
tell him candid tales of the long hours, the competitive culture, the
money, the stress. One woman said of her colleague, “I sit next to this
girl who has a son whom she never sees. She gets in early, goes out very
late, and the nanny sits at home.” Some are desperate to brag to
Luyendijk about their clients or their best deal; others want to share
how bad they feel, how uncomfortable they are with the depiction of
their work. “Banking today is like playing Russian roulette with someone
else’s head,” one banker said. Unlike
many finance-centric books, Luyendijk goes beyond the front-office—an
industry term that refers to those in the professions most often seen in
the movies: traders, investment bankers, deal makers, financial
advisors. These workers, particularly the male ones, were full of
bravado when responding to Luyendijk, and some had quick dismissals for
every critique of the industry: The City pays a ton in taxes, creates
jobs, and supports much of London, they argued.
But these workers make up
only a fraction of the thousands of bank employees who work in
compliance, human resources, IT, and a variety of other critical roles.
This group gets little of the limelight and often little respect from
those who earn higher salaries and bonuses. And yet, Luyendijk finds,
they still have strong feelings about working for a bank. Even if they
aren’t the ones pricing deals or making trades, they feel pride or shame
at being associated with the industry. “You become part of the fabric
of the place. Then they dispose of you,” one woman, who had worked in
support roles for over a decade, told Luyendijk after being fired.
Still, upon receiving the news, she went back to her desk and started
sending emails about an ongoing project to ensure that her colleagues,
and the bank, wouldn’t suffer from her absence. Perhaps one of the most
important contributions of Luyendijk’s book is in giving voice to these
people, who support—and, in some cases, enable—the financial industry.Among the Bankers shows
just how intricate and fractured the global banking system is, with
departments within the same bank unaware of what their own companies are
doing. That makes the banks not only too big to fail, but possibly too
big to manage. Their sheer size creates two problems: the inability to
identify and remedy problems—such as rogue traders—but also a culture
that allows for the plausible deniability of its leadership. Luyendijk
concludes that bank employees—often singled out as the driving force
behind the economic collapse—aren’t solely to blame. There is a system
that pushes them to take risks and a culture that shames anyone who
admits errors or weakness; these factors, Luyendijk argues, are more
culpable than any single person or even any group of people.
The
book illustrates what many who have ever ventured into banking, or know
someone who did, probably knows: that it is more often than not an
all-consuming job that pushes workers to conform or burn out. In one
conversation, a young banker describes making $60,000 per year before
his bonus, and how it quickly warped his sense of money. “I would spend
$300 on a night out and think nothing of it,” said the interviewee. In
another conversation, the author asks a banker if he has any friends
outside of finance. He responds by saying, “When you make $100,000 a
month you basically don’t have common interests with your friends
anymore.” That can change the way people dress and behave and can create
complex feelings of loyalty to an industry that has proven itself to be
mostly indifferent to outside conceptions of morality. “I have found
that many outsiders are deeply reluctant to accept that to an important
degree the financial world isn’t populated by people willfully doing
evil, but by conformists who have simply stopped asking questions about
right and wrong,” Luyendijk writes. Changing
a system in which one is in some way complicit is difficult. More than
that, the hierarchy of banking means that those in fields like
compliance can feel belittled or powerless to confront or rein in the
ambitions of front-office workers and executives, whose risky but
profitable strategies keep the entire operation afloat. “Nobody ever
challenges the front office,” one compliance officer told Luyendijk.
After all, if a bank goes down, its compliance officers do too. And, as
Luyendijk finds out, the employees in the financial industry vastly
outnumber those at regulatory agencies, plus they’re paid better and
better equipped to pivot quickly, leaving regulators to play catch up.
It’s no wonder banking culture has been so difficult to reform.
What
Luyendijk finds is that piecemeal changes to the financial industry
won’t create the change that many are hungry for; that would require a
massive overhaul of the entire system. Luyendijk describes his
prescription as “not repairs or a major clean-up but a completely new
DNA,” the sort brought about by huge shifts in law and policy. So far,
that type of change is nowhere to be found. There is no happy ending or
clear solution at the end of Among the Bankers, and though frustrating, that’s at least an honest conclusion about an often exasperating industry.
Smuggled into
Rogoff's proposal to axe cash is the privatisation of the currency.
Let's cling on to our notes, until publicly accountable central banks
are ready to create digital reddies
The proposal to abolish cash has a certain superficial appeal,
but—even before we get to the myriad practical problems—it could turn
out to smuggle in a dangerous agenda of stealth privatisation. Kenneth
Rogoff’s argument that we can simply abolish physical cash and switch to
using electronic money, completely misses one crucial difference
between the two—the institutions that create them.
“Electronic money”—that is, the numbers in your bank account, which
change every time you spend on a debit card—are not fully equivalent to
physical cash. They’re actually IOUs, or deposits created by banks when
they issue loans. As the Bank of England recently confirmed: “Commercial
banks create money, in the form of bank deposits, by making new loans.
When a bank makes a loan, for example to someone taking out a mortgage,
it does not typically do so by giving them thousands of pounds worth of
banknotes. Instead, it credits their bank account with a bank deposit of
the size of the mortgage. At that moment, new money is created.”
If physical cash, in the form of notes and coins can be considered
“public” money in the particular sense that it is created by a public
institution, bank deposits can be thought of as “private” money, again
in the specific sense of who creates them—namely, the banks. The Bank
and the Royal Mint, which respectively create notes and coins, have
clear rules of transparency and lines of accountability concerning the
volume and distribution of the money created. In contrast, the deposits
created by commercial banks do not have the same clear lines of
accountability. The private sector can effectively, at least in the
upswing of the business cycle, create as much as they want.
Worse, the money held in your account is, legally speaking, the
property of the banks. The physical cash you hold is, as you’d expect,
legally yours. If we moved to an “electronic money only” situation, as
Rogoff is proposing, without creating a new “digital cash,” our nation’s
whole process of currency creation would have been completely
privatised.
Having a privatised currency may appeal to some, but the 2008 crisis
is pretty clear evidence that the banks aren’t doing a very good job of
creating money. Indeed, they have been seriously abusing their
privilege. After 30 years of financial deregulation, banks create new
money predominantly for the financial and property markets, bloating the
financial sector, and puffing up housing bubbles. With the private
sector still heaving under the mountain of debt, little has changed
since the crash.
Rogoff also pleads that it is necessary to give cash the axe, because
it will allow central bankers to shift to negative interest rates. But
that implies that the barrier to monetary policy working is simply that
central banks can’t cut interest rates enough. This misses important
reasons about why low interest rates aren’t working. Negative rates are
simply a continuation of the ultra-low rates of the last seven years.
And they’ve failed to stimulate the economy—witness the slowest recovery
in history—chiefly because people and businesses don’t want to take out
more debt.
Low rates only work by encouraging more private sector borrowing. But
with private debt still sky high, there wouldn’t be much room to pile
on much more—even if it were wise. Suggesting that 0.25 per cent rates
are not low enough is like assuming that if a mallet didn’t fix the
software problem on your computer, then it is time to reach for a
sledgehammer.
Rather than chase after negative rates and the abolition of cash, we
should consider other options, such as “digital cash” and monetary
financing. Unlike deposits made up by the banks, proper digital cash
really could work as a replacement for physical money and a means of
discharging the government’s duty to provide the public with a safe form
of currency. The first feature of real digital cash is, of course, that
it is created by the central bank. It could then be an electronic
version of notes and coins. It would also generate income for the
government, just as the issuing of physical money has always boosted the
state’s coffers, through the process known as seigniorage. By allowing
the banks to create all the electronic money we use today, the state is
shooting itself in the foot; let us not make that problem worse.
The other big idea gaining traction is monetary financing. It is far
more preferable to ever-lower interest rates, which no longer work.
Central banks would create new money, and use this to fund government
spending, which could in turn support employment, investment and
incomes. This might sound dangerously radical, but it’s currently
considered fine for banks to create money, irrespective of whether they
use it to lend to businesses for productive investment or instead to
support speculation in land or financial assets. In this context, the
taboo on creating money to finance state spending on worthwhile things
is hard to sustain.
Digital cash could work hand-in-hand with monetary financing in
various ways. One idea would be for every citizen to have a digital cash
account at the central bank, perhaps administered by a private bank. If
monetary financing became part of the toolkit, the award of a cash
transfer into digital cash accounts would be a remarkably
straightforward way to inject money into the economy.
This human invention, this tool, we call “money” is changing fast.
But we need to direct these changes towards a money system that works in
the public interest and helps to build a more stable and fair economy.
That will involve some much bigger thinking than simply getting rid of
cash.
Image copyrightAFPImage caption
"End of an era": Rodrigo Rato, once hailed as an
economic genius, is taken from his office by police for interrogation in
April 2015
An initiative
launched by a handful of political activists in 2012 is on the verge of
striking the biggest blow yet in a fight over allegations of political
corruption in Spain.
On Monday, dozens of former members of the
board at Spanish bank Bankia go on trial in Madrid on charges of
misappropriation and fraud.
Among them, the activists' prize catch: former minister and IMF chief Rodrigo Rato, who denies any wrongdoing.
How did we get here?
It
all began at a meeting in Barcelona over four years ago, held to mark
the first anniversary of the 15 May 2011 "indignado" ("indignant")
protests against corruption and cronyism.
"Why don't we have Rato sent to prison in five years' time?" asked one attendee.
"So
we drew up a rational plan with a reasonable production timeframe
towards that goal," says Sergio Salgado drily. He is a leading member of
the campaign group 15MpaRato, which is directly responsible for Mr Rato
going on trial. Image copyrightGetty ImagesImage caption
Protesters demand justice for "all the guilty thieves" in 2014
"We have nothing personal against him," explains Mr Salgado.
"He
is the symbol of the revolving doors culture. He has been a minister,
then managing director at the IMF and a banker. And he was a very
well-known figure," says Simona Levi, another leading figure in
15MpaRato.
Who is Rodrigo Rato?
Now
67, Mr Rato was economy minister in the conservative Popular Party (PP)
governments of Prime Minister Jose Maria Aznar from 1996 to 2004. Mr
Rato was often credited with being the "mastermind" of Spain's economic
boom, before it turned to bust when a real-estate bubble burst in 2008.
When
the PP lost power in 2004, Mr Rato became IMF chief, a post he suddenly
left in 2007 for "personal reasons". In 2010 he was named chairman of
Bankia, a bank formed by the fusion of Caja Madrid with other public
savings banks, all struggling to deal with the blowback from years of
easy lending to construction projects.
On his watch, Bankia became the bank that symbolised Spain's financial crisis.
As Spain's fourth biggest bank, it listed on the stock market in July 2011
Bankia said initially it had made an operating profit in 2011 of €305m (£265m; $340m)
Mr Rato was forced to resign as Bankia chairman and the bank was nationalised at a cost of €22bn in public money
The shares bought by over 200,000 small investors became worthless overnight
What did the activists do?
The
small team at 15MpaRato started compiling evidence of what they saw as
fraudulent information given to people with accounts at Bankia who had
been given the chance to buy "preferential" shares before the flotation.
They encouraged small investor "victims" to come forward, sue
Bankia, and help them build a credible narrative with which to persuade
public prosecutors to take action.
Bankia eventually agreed to
give back €1.5bn to the approximately 200,000 who had bought
preferential shares when Spain's courts accepted a Bank of Spain report
that established there had been deception.
Mr Rato's role in this alleged fraud is still being investigated with no date set for that trial yet.
Rodrigo Rato and the case of the 'black credit cards'
What
no-one expected was the case of the "black credit cards" - and that is
why the former Spanish economy minister goes on trial on Monday.
The evidence arrived in 2013, when Simona Levi opened a whistle-blowing email.
In
the email was a complete list of people accused of using secret credit
cards issued to board members and advisers at Caja Madrid and later
Bankia, as well as claims about what they had spent their money on. Image copyrightAFPImage caption
The 'black credit card' scandal "offended people's innate sense of justice", says Mr Salgado
"At first you read these huge amounts of information
that come through that account and you don't take it too seriously. But
then we began to think 'wow, this is a real treasure'," Ms Levi
recalls.
The list was a who's who of Spanish political life,
including representatives of political parties from the left and right,
unions, a secretary to Spain's royal family and the bank's top
management, including Mr Rato. And the 15MpaRato activists shared it
with Spanish media.
The total sum spent between 1999 and 2012
amounted to €15.5m - money supposedly meant to cover the costs of
attending board meetings, but often allegedly used for personal items or
simply taken out of cash machines.
"The amount was not the thing.
It offended people's innate sense of justice. We all go to cash
machines; you might have some money in there, sometimes not enough. But
these people always had what they wanted," says Mr Salgado.
What are Mr Rato's prospects?
Image copyrightGetty ImagesImage caption
The 'black credit card' case has enraged former shareholders in Bankia
Mr Rato faces a possible jail sentence of up to 10
years if found guilty of running and expanding the secret credit card
system, and may be put on trial in at least three other cases.
Prison
would complete the downfall of a man once considered a probable prime
minister of Spain but who in 2014 felt forced to give up his PP
membership card.
In 2015 it emerged that he was being
investigated for tax fraud after taking advantage of a fiscal amnesty
three years earlier, repatriating money he had been keeping abroad. This
investigation caused him to be briefly arrested in April 2015.
He denies any wrongdoing.
Rodrigo Rato's fall from grace
Image copyrightGetty ImagesImage caption
When he was arrested in 2015, El Mundo newspaper
wrote of "a point of no return, in which we leave behind an era"
2004: Mr Rato leaves Spain's economy ministry to head IMF 2007:
He returns to Spain after three years in Washington, citing unexplained
personal reasons. An internal IMF report in 2011 criticised the
organisation under Rato's leadership, saying it "failed to anticipate
the crisis, its speed and magnitude" 2010-12:
During his 18-month stint at Bankia, Spain sees the unravelling of the
biggest banking disaster in its history, prompting an EU bailout of
Spain's financial sector July 2012: Mr Rato is called to court to explain Bankia management, following complaints from 15MpaRato and political party UPyD 2013: His name crops up in the "black credit card" affair 2014: Mr Rato resigns from Popular Party 2015: Arrested for seven hours during police search of home and office . 2016:
Panama Papers leak reveals Mr Rato as a client of Mossack Fonseca,
which helped him to wind up two offshore companies worth €3.6m
U.S
firms are resorting to sophisticated forms of manipulation otherwise
known as fraud to prop their earnings. The goal is to create an illusion
that all is well when in fact it is not; it’s like the band playing
happily away on the Titanic just before it sank. The data manipulation
is quite sophisticated, so it is almost impossible to get a true glimpse
into the financial performance of a given company. Soon, you will have
to resort to the time-tested metric of allowing a monkey to shoot darts
at a random list of stocks, to find you next winner. In a
nutshell, there’s a standard known as generally accepted accounting
principles, or GAAP, which encourages some uniformity in how companies
will report financial results. Unfortunately, the strict standards of
GAAP often force companies to report big one-time, non-recurring items
that will distort quarterly earnings, in turn making them a poor
reflection of underlying operations. And so, many companies will make
adjustments for these items and separately report adjusted or non-GAAP
financial results.
Must Read: Margin trading comeback could propel Chinese Markets Upwards
All
of that’s well and good. But there’s an unsettling trend we’ve been
witnessing: the gap between GAAP and non-GAAP numbers is widening.
Specifically, this “GAAP gap” is widening in such a way that more and
more costs and expenses are being removed to make underlying profits
look higher. “The gap between GAAP (reported) and pro forma (adjusted)
EPS continued to widen in 4Q, with the GAAP/Pro forma ratio of 0.74
still at its most extreme levels since 2009,” Bank of America Merrill
Lynch’s Savita Subramanian said on Monday. “Trailing four-quarter (2015)
GAAP EPS came in at $87 vs. $118 for pro forma EPS.” Full Story
Another topic we spoke of that is coming to fruition; the rise in fraud; we are in the “what’s love got to do with it” era.
Whatever crap corporations can get away with they will put to use, in
their quest to ensure that they lock in massive bonuses. This is why we
stated that corporate debt and fraud would reach insane levels before
this bubble blows up. When people were talking about margin debt
soaring last year to match 2007 levels, we said so what, when they spoke
of hot money supporting the market, our response was the same. You need
to understand that there is a new trend in motion, a trend that the
world has not seen before. There is nothing more than 90% of the
populace is not willing to do for money; if the price is right, they
will sell their soul. So get used to this new trend and be careful who
you call your friend, be especially careful of family members for they
are the ones that quite happily and willing stab you in the back, and
they usually stab very deep. If you understand the problem the solution
is easy; in this instance, it means that the markets will soar to
levels that will appear sane only after you smoke a combo of crack and cocaine. So don’t bother trying to figure out the markets, go with the trend, it’s your friend, everything else is your foe.
Press release Italy: the Court of Bolzano on the issuance of currency by commercial banks
by lawyer Marco Della Luna, September 26, 2016
The issuance of currency by commercial banks was admitted recently by the People's Bank of South Tyrol (Banca Popolare dell’Alto Adige) in real estate enforcement proceedings 216/2014.
The judge in that case held that this practice is effective and legitimate, by writing, in the order 7/6/16:
"As, however, a breach of Article 127 (ex Article 105) of the European Union's founding treaty, we do not understand why the creation of money through the banking system may violate that provision, which has nothing to that effect, as it is absolutely irrelevant the reference to article 10 banking Act, which does not prohibit such a system, since in any case the Euro is a coin that is not representative, it is not required a value for each printed ticket as the era of the gold standard ... ".
The bank had declared: "The Maastricht Treaty does not reserve the ECB money creation, but literally the issue of (euro denominated) banknotes and minting of coins. The Italian Civil Code does not recognize banknotes and coins at the only legal tender (if it was that, according to anti-money laundering legislation, it would have prohibited any deal providing for the payment of a price equal to or more than € 3,000; similar limits are also in place in most countries of European Union). Banca Popolare dell’Alto Adige does just what the art. 10 TUB provides, namely the collection of savings (anyone can open at any time a savings account or open a bank account) and the provision of credit (like the claimant know, Banca Popolare actually grants loans and credit facilities).
The "money creation" by the commercial banks, the existence of "book money", the phenomenon of "fractional reserve" are completely legitimate features of our economic and monetary system and an expression of freedom of contract. If a bank makes a loan to a customer, we have a simple phenomenon of expansion of the balance sheet ( "Bilanzverlängerung"). "
The problem, however, rest in the accounting of the very same process of money creation by the banks: Cash Flow Statements don't account for money creation today.
The
country’s top white collar crime expert, William Black – who put over
1,000 top S&L executives in jail for fraud, and is a professor of
law and economics at the University of Missouri – confirmed recently
what the alternative media has been saying for years: the business plan of Wall Street is fraud. That’s their key profit center.
Black also says that a British parliamentary investigation Tories found that allof the retail profits of the largest banks in the UK came from fraud.
“The banks have been allowed to investigate themselves,” one source familiar with the investigation told Reuters. “The investigated decide what they want to investigate, what they admit to, and how much they will pay."
Italy’s gold has had an eventful history. Robbed by the
Nazis and taken to Berlin. Loaded on to gold trains and sent to
Switzerland. Flown from London to Milan and Rome. Used as super-sized
collateral for gold backed loans from West Germany while sitting quietly
in a vault in New York. Leveraged as a springboard to prepare for Euro
membership entry. Inspired Italian senators to visit the Palazzo Koch
in Rome. Half of it is now in permanent residency in downtown Manhattan,
or is it? Even Mario Draghi, European Central Bank (ECB) president, has
a view on Italy’s gold. The below commentary tries to make sense of it
all by bringing together pieces of the Italian gold jigsaw that I have
collected.
2,451.8 tonnes
According to officially reported gold holdings, and excluding the
gold holdings of the International Monetary Fund (IMF), Italy’s central
bank, the Banca d’Italia, which holds Italy’s gold reserves, is ranked
as the world’s third largest official holder of gold after the US and
Germany, with total gold holdings of 2,451.8 tonnes, worth more than US$
105 billion at current market prices. Notable, Italy’s gold is owned by
the Banca d’Italia, and not owned by the Italian State. This contrasts
to most European nations where the gold reserves are owned by the state
and are merely held and managed by that country’s respective central
bank under an official mandate.
Italy’s gold reserves have remained constant at 2451.8 tonnes since
1999. Although the Banca d’Italia has been a signatory to all 4 Central
Bank Gold Agreements and could have conducted gold sales within the
limits of the agreements between 1999 and the present, it did not engage
in any gold sales under either CBGA1 (1999-2004), CBGA2
(2004-2009), or CBGA3 (2009-2014), and as of now, has not conducted any
sales under CBGA4 (2014-2019). With 2,451.8 tonnes of gold, the Banca
d’Italia holds marginally more than the Banque de France, which claims
official gold holdings of 2,435.8 tonnes.
Gold as a percentage of total reserves for both banks is very
similar, with Italy’s gold comprising 69.7% of total reserve assets
against 67.2% for France. Similarly, German’s gold reserves, at 3,378.2
tonnes, are 70.1% of its total reserves. See the World Gold Council’s Latest World Official Gold Reserves data for details.
So it appears that the big three European gold holders consider their
gold to be a critical part of their foreign reserves and are keeping
the ratio of their gold to total reserves within around the 70% mark.
Towards Transparency?
In April 2014, Banca d’Italia published a 3 page report about Italy’s gold reserves titled “Le Riserve Auree della Banca D’Italia”
(published only in Italian). The report highlights that Italy’s gold is
held in four storage locations, one of which is in Italy.
Specifically, in the report, Banca d’Italia confirmed that 1,199.4
tonnes of its gold, approximately half the total, is held in the Bank’s
vaults which are located in the basement levels of its Palazzo Koch headquarters in Rome. The majority of remainder is stored in the Federal Reserve Bank’s gold vault in New York. The report also states that small amounts of Banca d’Italia gold are stored at the vaults of the Swiss National Bank in Berne, Switzerland, and at the vaults of the Bank of England in London.
As to why Italian gold is stored abroad in New York, London and Berne
and not in other countries, is explained by historical data, and
explained below.
Palazzo Koch
In its Palazza Koch vaults in Rome, the Banca d’Italia claims to store 1199.4 tonnes of gold. Of
this total, 1195.3 tonnes are in the form of gold bars (represented by
95,493 bars), and 4.1 tonnes are in the form of gold coins (represented
by 871,713 coins). While most of the bars in Rome are prism-shaped
(trapezoidal), there are also brick-shaped bars with rounded corners
(made by the US Mint’s New York Assay Office) and also ‘panetto’
(loaf-shaped) ‘English’ bars. The average weight of the bars in Palazzo
Koch is 12.5 kg (400 oz), with bar weights ranging from relatively small
4.2 kgs up to some very large 19.7 kgs bars. The average fineness /
gold purity of the Rome stored bars is 996.2 fine, with some of
the holdings being 999.99 fine bars.
The Banca d’Italia also states that 141 tonnes of gold that it
transferred to the ECB in 1999 as a requirement for membership of the
Euro is also stored in Palazzo Koch. This would put the total gold
holdings in the Palazzo Koch vaults at 1340 tonnes. Gold transferred to
the ECB by its Euro member central banks is managed by the ECB on a
decentralised basis, and is held by the ECB in whatever location it was
stored in when the initial transfers occurred, subject to various
location swaps which may have taken place since 1999.
The Vault is revealed
While the Banca d’Italia’s 3 page report appears to be the first official written and self-published confirmation
from the Bank which lists the exact storage sites of its gold reserves,
these four storage locations were also confirmed to Italian TV station
RAI in 2010 when an RAI presenter and crew were allowed to film a report
from inside the Bank’s gold vaults in Rome. This RAI broadcast was for an episode of ‘Passaggio a Nord Ovest’, presented by Alberto Angela.
Translation of Video
For those who don’t speak Italian, such as myself, I asked an Italian
friend to translate Alberto Angela’s video report and the other
voice-overs in the report. The translation of the above video is as
follows:
“Banca D’Italia features a secret and extremely important place which represents Italy’s wealth: it’s our gold reserve.
We’ve had a special permission to visit this place, called “the sacristy of gold.” Here
there’s a big protected door, and three high personnel from Banca
d’Italia who are opening the door for me. Three keys are needed to open
the door of the vault, one after the other and operated by three
different people. Obviously we can’t show the security systems nor the
faces of these men, but the door is huge, at least half a metre, and
leads to another gate where again three keys must be used. Past this,
that’s where our country’s gold is kept.
Here we are. It’s exciting to get in here, the environment is simple, sober. [general commentary, then camera shows a large amount of gold]
This is not all the gold we own, as
part of it is also stored in The Federal Reserve in the US, in the Bank
of England in the UK and in Banca dei Regolamenti Nazionali in
Switzerland. I’m speechless when exploring the sacristy, … you don’t see this every day.
The value of all this gold is
established by the European Central Bank, that also establishes its
price. The overall value appears in the end of year balance. In 2005 the
gold was valued at 20 miliardi of Euros (billions)
There are three types of lingotti (square-shaped gold). {he says how much the bars weigh}
They feature some signs on them, to say that they have been checked. Some
are almost 100% gold, pure gold. There’s also a serial number on the
gold, and a swastika on some of them as the Nazi took away all our gold,
transferring it first to the north of Italy and then to Germany and
Switzerland. At the end of the war part of it came back featuring the
Nazi sign.
This gold represents the symbol of
our wealth, without this we wouldn’t be able to deal with the rest of
the world, it’s a symbol for Italy, a guarantee, like a
family’s jewelry. They can be used to get loans as happened when Italy
asked for a loan from Germany and they demanded, as a guarantee, the
value in gold. So the name Germany was put on this gold at the time.
{the reporter then talks about going from
gold to notes and ‘convertibility’ – trust in the States is now the
guarantee for exchanges, and not gold, says the voice. It’s a relation
of trust … Banca d’Italia keeps an eye on this. After Maastricht, a lot
of our gold has left Italy to join the other countries’ gold to create
the communitarian reserve of the Euro}”
Note that the reporter, Angela, states that in addition to Rome, the
Italian gold is stored at the Federal Reserve Bank in New York, the Bank
of England in London, and at the Bank of International Settlements (BIS) in Switzerland. The reporter uses the exact words “Banca dei Regolamenti Nazionali”.
The BIS and SNB
This BIS as Italy’s gold custodian was also confirmed in 2009 by Italian newspaper “La Repubblica”, which published an article about Italy’s gold,
stating that it was held in Rome, at the Federal Reserve in New York,
in the ‘vaults’ of the BIS in Basel, and in the vaults of the Bank of
England.
This apparent inconsistency between a) the Banca d’Italia’s report,
which claims that its gold in Switzerland is at the Swiss National Bank
(SNB) in Berne, and b) the RAI broadcast, which states that some Italian
gold is stored with the BIS in Switzerland, is technically not a
contradiction since the BIS does not maintain its own gold storage
facilities in Switzerland. The BIS just makes use of the SNB’s gold
vaults in Berne.
If you look on its website, under foreign exchange and gold services,
the BIS specifically states that it uses ‘Berne’ as one of its
safekeeping facilities for gold, i.e. it offers its clients “safekeeping and settlements facilities available loco London, Berne or New York”.
Loco refers to settlement location of a precious metals transaction. By
confirming that its Swiss storage is with the BIS, and that it also
stores gold at the Swiss National Bank in Berne, the Banca d’Italia has,
maybe inadvertently, confirmed that the BIS makes use of the Swiss
National Bank’s gold vaults, and that the SNB vaults are in fact in
Berne. while its knwn that the SNB gold vaults are in Berne, the SNB
rarely, if ever, talks about this.
However, in 2008, Berne-based Swiss newspaper “Der Bund” published an
article revealing that the SNB’s gold vaults are in Berne underneath
the Bundesplatz Square. Bundesplatz Square is adjacent to the SNB’s
headquarters at No. 1 Bundsplatz. BIS literature, such as the official
BIS history publication “Central bank Cooperation at the Bank for International Settlements, 1930 – 1973”
also confirms that the SNB gold vaults are in Berne and that the BIS
and the Banca d’Italia have held gold accounts with the SNB in Berne
since at least the 1930s. Note that the SNB actually has two
headquarters, one in Berne, the other in Zurich at Börsenstrasse.Its
quite possible that some of the SNB custodied gold is also stored in the
vaults of its Zurich headquarters under Paradeplatz or Bürkliplatz.
Simple Questions met with Ultra-Secrecy
In April 2014, in two emails, I asked the Banca d’Italia’s press
office specifically about this SNB / BIS situation, and also about the
Banca d’Italia gold stored in New York, (and also about gold leasing –
see separate section below). My questions were as follows:
“The Bancad‘Italia
states in its April (2014) gold document that the Italian gold held in
Switzerland is stored at the Swiss National Bank in Berne. Previous profiles of the Bancad‘Italia
gold storage arrangements in an RAI TV broadcast in 2010 and in a La
Republica newspaper article in 2009 state that the Italian gold in
Switzerland is deposited with the Bank of International Settlements
(BIS).
Given that the BIS use the SNB vaults
in Berne to store gold deposited with them (since they don’t have their
own gold storage facilities in Switzerland), then the reference to the
SNB is not surprising.
However, my question is, does the Bancad‘Italia store its gold in Berne as gold sight deposits with the BIS or as earmarked custody gold with the SNB, or a combination of the two?”
“Is the gold of the Banca d’Italia
that is held by the Federal Reserve Bank of New York held under earmark
(custody), or held in a sight account?”
The Banca d’Italia responded (simultaneously on all questions):
“This is to inform you that unfortunately Banca d’Italia will not be giving information in addition to the website note.
Regards
Press and External Relations Division, Secretariat To The Governing Board And Communications Directorate, Bank of Italy”
By ‘website note’, the press and external relations division was
referring to the 3 page report on gold reserves (see above) that the
Bank published in April 2014.
Nazi Bars in Rome
The RAI television broadcast from 2010 was also notable in that it
revealed that the Banca d’Italia holds bars of varied origins in its
Rome vaults, including bars stamped with the official Bank of England
stamp, and bars from the US Assay Office in New York including a
featured bar from 1947. There are also Russian bars shown in the RAI
video, one of which is shown in the video with the CCCP lettering, the
hammer and sickle stamp, and the letters HKUM.
More surprisingly perhaps, is the fact that the Banca d’Italia also
holds Nazi gold bars from the Prussian Mint in Berlin. The RAI broadcast
video shows a 1940 Nazi bar from Berlin, stamped with the eagle
and swastika insignia and with Prussian mint markings. The Nazi bar
holdings can be explained by the fact that the Italian gold was
confiscated by the Nazis during World War 2 and ended up being moved out
of Rome up to the north of Italy and then most of it was transported
onwards to Berlin in Germany or else to Switzerland. Following the war,
some of the gold given back to the Italians as part of the Tripartite
Commission payouts happened to be Prussian Mint bars stamped with the
Nazi symbol (see below for historical account of Italian gold movements
during World War 2). A view of the gold on shelves in the Palazzo Koch vaults, Rome
The Foreign held Italian gold
The Banca d’Italia gold document does not specify how much of the
Italian gold is held in New York, London and Berne, apart from stating
that most of the gold that is not stored in Rome is stored in New York.
Note that this is even less transparent than the brief information that
the Deutsche Bundesbank publishes about its gold reserves storage
locations. However, the Banca d’Italia document does state that “the bulk” of foreign stored gold is in New York (“la parte più consistente è custodita a New York“), and that “contingents of smaller size” are located in London and Berne (“Altri
contingenti di dimensioni più contenute si trovano a Berna, presso la
Banca Nazionale Svizzera, e a Londra presso la Banca d’Inghilterra“).
While one could argue about the meaning of ‘the bulk’ in terms of
quantity, essentially the Banca d’Italia gold document implies that the
London and Berne holdings are not very large. More specifically, it is
possible using historical data and records of Italian gold movements to
infer that there is little Italian gold in London and Berne.
Not a lot in London
It does not look like Banca d’Italia holds anything other than a very
small amount of gold in London. During the late 1960s, mainly between
1966 and 1968, the Banca d’Italia transported most of the gold that it
had stored at the Bank of England vaults back to Italy. Regular
shipments were exported and delivered by MAT (the secure transport
company) to the Banca d’Italia’s vaults in both Rome and Milan,
sometimes about 4 tonnes at a time, sometimes 10 tonnes at a time.
Historic Bank of England gold account “set-aside” ledger entries (C142/5 Bullion Office Set Aside Ledger, A-K, 1943-1971) show
that by the end of 1969, the Banca d’Italia only held 988 gold bars in
London, weighing 396,000 ozs, or approximately 12.34 tonnes. In support
of the veracity of this statement, see the specific ledger entry below.
During the Banca d’Italia’s gold transport period out of the Bank of
England, various other transfers were also made from the Banca d’Italia
gold account to the BIS gold account at the Bank of England. Since
Italian gold reserves have not in total changed very much since December
1969, it is realistic to assume that the Banca d’Italia’s London gold
holdings have not changed dramatically since December 1969, unless there
have been location swaps executed since that time between London and
New York or between London and Berne. This would generally only have
been done for a specific reason such as to allow Italian gold lending
through the London market. Significant gold lending only began in London
in the mid-1980s, and the Banca d’Italia has never been on public
record as having engaged in gold lending on the London Gold Lending
Market.
Another possibility is that the Italians now use the BIS gold
account(s) to hold gold in London in the same way that they do in Berne.
This would allow the statement that some of the Italian gold is held in
London to be true, even though the gold would, in this case, be held
via the BIS gold account at the Bank of England, and not directly by a
Banca d’Italia gold custody account in London.
Little in Berne
There does not appear to have been any Italian gold left in Berne
after WWII (see historical details below), so whatever Italian balance
is currently in Berne has been built up since 1946. Of relevance to the
gold vaults in Berne, both the central banks of Finland (Bank of
Finland) and Sweden (Riksbank) recently published the international
locations of their gold reserves, and revealed that only very small
percentages of their gold is kept in the Swiss National Bank vaults in
Switzerland. Of the Riksbank’s 125.7 tonnes of gold reserves, only 2.8 tonnes (2.2%) is stored in the SNB vaults. For the Bank of Finland, only 7%, or 3.4 tonnes of its 49.1 tonnes of gold reserves are stored with the SNB in Switzerland.
Mostly in Manhattan
If this Swedish-Finnish 2-7% range of allocations held at the SNB was
applied to the Italian gold that held outside Italy, it would result in
between 25 tonnes and 87.6 tonnes of Italian gold being held at the SNB
vaults in Berne. Factoring in 12 tonnes held at the Bank of England and
a small amount held in Berne, this would imply nearly 1,200 tonnes of Italian gold at the Federal Reserve in New York.
There were at least 543 tonnes of Italian gold at the Federal Reserve
in New York in the mid-1970s, since this was the quantity of Italian
gold collateral that the Bundesbank held at the New York Fed during its
first gold loan to Italy between 1974 and 1976 (see discussion below of
the 1970s West Germany – Italy gold loan). If the quantities in London
and Berne are as low as they appear to be, this 543 tonnes used as
collateral might not have even been half the gold that Italy has
custodied with the Federal Reserve Bank of New York.
A gold vault in Milan
It’s notable that the Banca d’Italia has used a vault in the city of
Milan to store gold as recently as the late 1960s, although there is no
mention of a Milan vault in the Banca d’Italia’s 2014 gold document.
This would either imply that the gold stored in Milan in the 1960s was
transported to Rome at a later date, or else that the Rome statistics
may represent combined holdings stored in Rome and Milan, and are just
rolled up to Rome for reporting purposes, since Rome is the head office
of the Banca d’Italia. The Banca d’Italia’s Milan vault did feature as a
key part of Italian gold movements during World War 2 (see below).
Historical Italian Gold
Like other central banks, the Banca d’Italia states that it uses
4 storage locations partly due to historical reasons and partly based on
a deliberate strategy gold storage diversification strategy.
Although the Banca d’Italia held 498 tonnes of gold in 1925, Italian
gold reserves fell to 420 tonnes in 1930, and continued to decline
throughout the 1930s, falling to 240 tonnes in 1935, before another
sharp fall to 122 tonnes in 1940 at the beginning of World War 2. With
both Rome and Northern Italy under German occupation in 1943, the German
occupiers pressurised the Banca d’Italia’s governor Azzolini to move
the Italian gold north. Ultimately this led to 119 tonnes of Italian
gold being transported by train
from Rome to the Banca d’Italia’s vaults in Milan. But the transfer to
Milan turned out to be just an interim stopover since the Germans
continued to pile on pressure to move the Italian gold to Berlin.
The fascist government that controlled Northern Italy at that time
initially resisted the German plan, but negotiated a compromise and
agreed to move 92.3 tonnes of gold to a castle in Fortezza,
in the far north of Italy near the Austrian border, close to the
Brenner Pass and likewise very close (via Austria) to the German border.
Eventually the fascist government capitulated fully to the German demands and 49.6 tonnes of Italian was moved from Fortezza to the Reichsbank vaults in Berlin, followed by an additional transfer of 21.7 tonnes, so in total 71.3 tonnes of Italian gold ended up in the Reichsbank in Berlin. See here for graphic showing these wartime movements of Italian gold, and a comprehensive discussion (in Italian).
In the 1930s, the Bank for International Settlements Bank had
invested substantially in Italian short-term treasury bills, which had a
built-in gold conversion guarantee. Likewise, the Swiss National Bank
held or was the representative for claims on some of the Italian gold.
With the German pressure on the Italian gold in 1943, the BIS and SNB
both became anxious about their investments and requested that their
Italian gold-related be fully converted into gold with a view to moving
the converted gold to the SNB vaults in Berne, Switzerland.
The Gold Trains to Berne
After intense negotiations, which the Banca d’Italia also supported
(since it would allow some of the Italian gold to go to Switzerland and
so avoid Berlin), the SNB and BIS succeeded in releasing the gold
transfers, and over 72 years ago on 20th April 1944, 23.4 tonnes of Italian gold was sent by train from Como in Italy to Chiasso in Switzerland and then onwards by another train to Berne. This required four
railcars, two with 89 crates of gold weighing 12,605 kgs for the BIS
(1,068 bars in total), and two other railcars of gold bars for the SNB
which probably contained 9-10 tonnes – since this was the
balance of Italian gold which did not go to Berlin or to the BIS but
which had been moved to Fortezza from Milan.
A few days later on 25th April 1944, the Banca’Italia also executed
an additional intra-account transfer in the Berne vault to the benefit
of the BIS. This was part of a location swap with the BIS. To quote the
official BIS historical narrative:
“On 25th April 1944, the Bank of
Italy transferred an additional 3,190 kgs of fine gold from its own gold
account with the Swiss National Bank in Berne to the BIS gold account
there.” (Central Bank Cooperation at the Bank for International Settlements, 1930-1973, Gianni Toniolo, BIS).
The actual transfer comprised 244 gold bars containing 2,966 kgs. An
additional 233 kgs was debited from the Banca d’Italia sight account
with the BIS, which suggests that the Italians only had 2,966 kgs in
physical gold stored in Berne with the balance having to come from their
sight deposit with the BIS (i.e. unallocated storage). (See “Note on gold shipments and gold exchanges organised by the Bank for International Settlements, 1st June 1938 – 31st May 1945.”
The above suggests that the Banca d’Italia had no gold in Berne at
the end of WWII. In fact, after WWII ended in 1945, the Italians
essentially had very little gold anywhere except for small amounts that
were left in Fortezza and found by the Allies, which was then returned
to the Italians. Italy started buying gold again in 1946 with a 1.8
tonne purchase from the Banque de France. The Italians also began
receiving gold back as reparations from the Tripartite Commission for the Restoration of Monetary Gold
(TGC), getting 31.7 tonnes a few years after WWII ended, and another
12.7 tonnes in 1958. Since 71.4 tonnes had been taken by the Germans to
Berlin, the Italians ended up with a net loss of about 27 tonnes due to
theft and/or other war losses.
Some of these post-WWII gold reparations contained the Nazi Prussian
Mint bars which are now stored in the Banca d’Italia’s Rome vaults. The
initial gold bar reparations for Italy in the late 1940s came from the
TGC account set up at the Bank of England. Records from the Clinton
Library show that Italy received 575 Prussian bars set-aside from the
TCG account in its early allocations. Prussian bars also made it to the
Federal Reserve in New York. The same records show that were over 2,500
Prussian Mint bars held under earmark at the FRBNY for various customers
as of January 1956 including the BIS, IMF, SNB, Bank of England,
Netherlands and Canada among others. Some of these bars were later
remelted into US Assay Office bars. (The Gold Report, Presidential Advisory Commission on Holocaust Assets in the United States, July 2000, Clinton Library).
In a similar way to other major European central banks, the Banca
d’Italia’s gold reserves were mainly built up during the late 1950s and
early 1960s. Although the Banca d’Italia was a relatively important
official gold holder during the first half of the 20th century, it
‘only’ held 402 tonnes of gold as of 1957. But starting in 1958 and
running through to the late 1960s, Italy’s gold reserves rose by nearly
600% to exceed 2,560 tonnes in 1970. See page 19 of “Central Bank Gold Reserves, An Historical perspective since 1845,
by Timothy Green, Research Study No. 23, published by World Gold
Council, for data on Italian gold reserve totals during the 1950s and
1960s.
Since 1970, Italy’s gold holdings have remained fairly constant,
although at times some of the Italian gold has been used in various
financial transactions such as:
gold collateral against a loan from Germany during the 1970s
contributions to the European Monetary Cooperation Fund (EMCF)
contributions to the European Central Bank (ECB)
The gold collateral transactions with Germany and the EMCF and ECB
contributions explain why, in the absence of purchases or sales, Italy’s
historic gold holdings statistics appear to fluctuate widely at various
times since the mid-1970s.
l’Ufficio Italiano dei Cambi (UIC)
Until the 1960s, most, if not all of Italy’s official gold reserves were held not by the Banca d’Italia, but by an associated entity called l’Ufficio Italiano dei Cambi (UIC). In English, UIC translates as the “Italian Foreign Exchange Office”. The UIC was created in 1945. One of its tasks was the management of Italy’s foreign exchange reserves (also including gold).
Therefore the Italian gold purchases in the 1950s and 1960s were
conducted for the account of the UIC, not the Banca d’Italia. However,
during the 1960s there were two huge transfers of gold from the UIC to
the Banca d’Italia, one transfer in 1960 and the second in 1965. In
total, these two transactions represented a transfer of 1,889 tonnes
from the UIC to the Banca d’Italia. The UIC’s main function then became
the management of the national currency and not the nation’s gold. The
UIC ceased to exist in January 2008 when all of its tasks and powers
were transferred to the Banca d’Italia.
Gold Collateral for the Bundesbank – 1970s
In 1974, Italy required international financial aid to overcome an
economic and currency crisis and ended up negotiating financial help
from the Deutsche Bundesbank. This took the form of a dollar-gold
collateral transaction, with the Bundesbank providing a US$ 2 billion
loan secured on Italian gold collateral of equivalent value. On 5th
September 1974, Karl Klasen, President of the Bundesbank, sent the
specifics of the collateral agreement to Guido Carli, Governor of the
Banca ‘dItalia. The details of the transaction were as follows:
US$ 2 billion was transferred from the Bundesbank to the Banca
d’Italia for value date 5th September. Simultaneously, for value date
5th September, the Banca d’Italia earmarked 16,778,523.49 ounces of gold (about 522 tonnes)from its gold holdings stored at the Federal Reserve Bank in New York into the name of the Bundesbank, and received a gold claim against the Bundesbank for the same amount. (2A96 Deutsche Bundesbank Files, 1974, Bank of England Archives).
The gold collateral was valued at $149 per ounce based on a formula
of 80% of the average London gold fixing price during July and August
1974. The loan was for a six month maturity but could be rolled over up
to three times, i.e. up to two years in total. It turns out that the
loan was rolled over up to the maximum two years allowed. Not only that, but the entire
gold-backed dollar loan was renewed in September 1976 with larger gold
collateral of 17.5 million ounces or about 543 tonnes. This gold
loan renewal in 1976 was underwritten by the UIC, and the 543 tonnes of
gold was transferred from the Banca’Italia to the UIC prior to the loan
renewal. Note that Paolo Baffi had become Governor of the Banca d’Italia
in 1975, taking over from Guido Carli.
In September 1978, at the 2 year maturity date of the renewal, the
543 tonnes of gold was returned to the ownership of the Italians but
instead of being transferred to the Banca d’Italia, the 543 tonnes was
transferred to the balance sheet of the UIC, since the UIC had been
involved in underwriting the entire loan agreement. This 543 tonnes of
gold stayed on the UIC books and was revalued over the years, thereby
creating a large capital gain for the UIC.
Gold capital gain Controversy – 1997/98
When the gold held by the UIC was sold to the Banca d’Italia in 1997,
the UIC realised a capital gain of 7.6 billion Lira which then became
taxable. The UIC then owed the Italian Exchequer 4 billion Lira, 3.4
billion Lira of which was transferred to the Italian State in November
1997. At the time in 1997, Italy was preparing for entry to the Euro,
and needed to keep its deficit under the 3% ceiling required by the
Maastricht Treaty criteria. Eurostat ruled that this windfall transfer
to the Italian Exchequer was not allowed to be offset against the
government deficit. See here for January 1998 statement from Eurostat.
However, a European Parliament parliamentary set of question in March 1998 to the European Council seems to suggests that the UIC tax payment to the Italian Exchequer was offset
against Italy’s public sector deficit, and that it helped to keep the
Italian deficit under the critical 3% Masstrict ceiling, thereby helping
Italy to qualify for Euro membership. The parliamentary questions were
from Italian politician Umberto Bossi:
“Does the Council intend to finally ascertain the nature of this transaction?
Does the Council intend to establish
whether it is permissible to encourage tax revenues of this kind to be
offset against the public sector deficit?
If not, does the Council not consider
that this incident shows yet again that Italy has not changed its ways
and is prepared to stoop to dubious accounting practices in order to
enter Europe?”
The answer to this parliamentary question
in June 1998 seems vague, but did not deny that the tax windfall
generated by the capital gain on the 543 tonnes of gold may have helped
improve the Italian fiscal condition in the run-up to Euro qualification
and entry.
EMCF and EURO
As referenced above, Italian gold has been contributed to various
European monetary experiments since the 1970s. This explains why the
yearly official total figures of Italian gold fluctuate widely over the
1970s-1990s period, and indeed have also fluctuated since 1999.
In 1979, Italy’s gold reserves dropped by 20% and stayed that way
until 1998 when they increased again to the previous 1979 level. This
was due to Italy contributing to the European Monetary Cooperation Fund
(EMCF) which was a fund within the European Exchange Rate Mechanism
(ERM) of the European Monetary System (EMS). In exchange for providing
20% of their gold and dollar reserves to the EMCF, member countries
received claims denominated in European Currency Units (ECUs). [The ECU
was an abstract precursor to the Euro]. The gold that was transferred to
the EMCF was accounted for as gold swaps, but there was no physical
movement of gold, it was just a book entry to represent a change in
ownership to the EMCF.
In 1999, with the advent of the Euro (initially as a virtual
currency), central bank members of the Eurozone had to again transfer
gold, this time to the European Central Bank (ECB). The ECB stipulated
that each member had to transfer foreign reserves assets, and 15% of
these transfers had to be in the form of gold. In Italy’s case it
transferred 141 tonnes of gold to the ECB, so Italy’s gold reserves fell
by this amount.
The gold owned by the ECB is not centrally stored and managed by the
ECB. It stays wherever it was when transferred by each member country,
and the ECB delegates the management of its gold reserves to
each member central bank, so essentially, it’s just another accounting
transaction. It’s unclear whether the ECB gold managed by the Banca
d’Italia on behalf of the ECB is “managed” any differently to the
non-ECB gold (i.e. its unclear whether the same investment policy always
applies to both gold holdings). One person who would certainly know the
answer to that questions is Mario Draghi, current president of the ECB,
former governor of the Banca d’Italia, and also born in Rome, home of
the Palazzo Koch gold vault.
Is any Italian Gold pledged or leased out?
Banca d’Italia annual reports follow International Monetary Fund
reporting conventions and classify the gold in its balance sheet as ‘gold and gold receivables‘.
In September 2011, when I asked the Banca d’Italia to clarify what
percentage of the asset category ‘gold and gold receivables’ in its 2010
balance sheet referred to gold held, and what percentage represented
gold receivables, the Bank’s press office replied succinctly that “it’s only gold, no receivables.”
Following the publication of the Bank’s three page gold document in
April 2014, I asked the Banca d’Italia press office a number of
questions (see above), one of which was about gold leasing:
“Are
any of the Bank’s gold reserves subject to lease agreements, and if so,
what percentage of the gold is leased out? Is any of the Bank’s gold
swapped or pledged in any other way?“
As mentioned above, the Banca d’Italia’s response was:
“This is to inform you that unfortunately Banca d’Italia will not be giving information in addition to the website note.
Regards
Press and External Relations Division, Secretariat To The Governing Board And Communications Directorate, Bank of Italy”
Gold Audits
The Banca d’Italia states in its 3 page gold document that external
auditors verify the gold held in Rome each year in conjunction with the
Bank’s own internal auditors. For the gold held abroad, the external
auditors are said to audit this using annual certificates issued by the central banks that act as the depositories (the
depositories being the Federal Reserve Bank of New York, the Bank of
England, and either the BIS or perhaps the SNB depending on the type of
certificate that is issued for BIS deposits).
This approach is analogous to the methodology used to audit the
German gold reserves stored abroad, i.e. there is no independent
physical audit of the gold stored abroad by the Bundesbank. The
paper-pushing auditors merely audit pieces of paper.
As regards the Banca d’Italia’s gold holdings at the Bank for
International Settlements (BIS), these holdings could either be in the
form of a “Gold Sight Account” or a “Gold Ear-Marked Account”, as explained here by the Bank of Japan in 2000 when it switched its gold holdings at the BIS from a gold sight account to a gold earmarked account:
“The Bank of Japan has recently
transferred its claims against the Bank for International Settlements
(BIS) embodied in a “Gold Sight Account” to a “Gold Ear-marked Account”
with the BIS.” (July 2000)
If the Banca d’Italia’s gold holdings at the BIS are just in a sight
account, then this is just a claim on a balance of gold, not a holding
of specific gold bars.
It’s also surprising to me that the mainstream media have taken a
significant, albeit superficial, interest in the Bundesbank’s ongoing
exercise to repatriate 300 tonnes of its gold reserves from New York to
Frankfurt, but zero interest in the fact that the Banca d’Italia
supposedly has a huge amount of gold stored in New York that has never
physically audited it and does not even see a need to repatriate it.
Banca d’Italia office in Manhattan
Like the Bundesbank, the Banca d’Italia also maintains a
representative office in New York, at 800 Third Avenue – 26th Floor, New
York – NY 10022 (see representative office contact details here). The head of this representative office is Giovanni D’Intignano (see LinkedIn).
Therefore, it should be very easy for the Banca d’Italia to ask the
Federal Reserve Bank of New York to conduct an on-site physical gold
audit of the Italian gold at the vaults of the New York Fed, all 1000
plus tonnes of it.
In fact, the Banca d’Italia also maintains another of its only 3
representative offices abroad in London at 2 Royal Exchange, London EC3V
3DG, which is right across the road from the Bank of England’s
headquarters and gold vaults. It should therefore also be a simple
matter for the Banca d’Italia to also organise a physical on-site audit
of its gold reserves stored at the Bank of England in London, something
the Bank of England has been allowing its gold storage customers to do since 2013.
Political Awakening
There has been a developing political trend recently in Italy for
more transparency on the Italian gold and also calls for its ownership
and title to be protected against control by outside entities.
In January 2012, Italian politican Rampelli Fabio (co-signed by Marco
Marsilio) submitted some written questions to the Italian Ministry of
Economy and Finance, a department headed at the time by Mario Monti
(Monti was also simultaneously Italian Prime Minister at that time),
asking the following questions about the Italian gold (questions 4-14567
: Italian version and English version):
“When and under what agreement or
statutory provision were the storage location decisions (regarding New
York, London and BIS Switzerland) taken and whether that strategic
decision is still considered to serve the interests of Italy?
Who owns the gold reserves held at Palazzo Koch (in Rome) and the gold reserves held at the foreign locations?
Does Italy have full availability to the gold reserves held at the Bank of Italy and at the foreign locations?”
Even though these questions were submitted nearly 5 years ago, the
official status of the questions on the parliamentary website still says
“In Progress”, suggesting that they have not been answered by the
Ministry of Finance. I can find no other evidence elsewhere either that
these questions were ever answered.
Senators visit Palazzo Koch vault
Three Italian senators of the political party Movimento Cinque Stelle
visited the Banca d’Italia gold vaults in Rome on 31 March 2014 and are
calling for the ownership of the gold to be transferred from the Banca
d’Italia to the Italian public so that its control cannot be
compromised. See video below of their before and after visit which was
broadcast from outside the Palazzo Koch vault in Rome.
These 3 representative (in the above video) are Senator Giuseppe Vacciano, Senator Andrea Cioffi and Senator Francesco Molinari. I do not have a direct English translation of this video, however, anyone interested can translate this page from Italian, which was published on 3 April 2014, and features Senator Vacciano explaining the senators’ vault visit.
In his report, Vacciano confirm some interesting facts, such as that the Italian gold belongs to the Banca d’Italia and not the Italian State. The ownership issue is also confirmed by the Banca d’Italia’s 3 page gold report (see above) which states:
“La proprietà delle riserve ufficiali
è assegnata per legge alla Banca d’Italia” – (Ownership of official
reserves is assigned by law to the Bank of Italy)
Unusually for a central bank, Banca d’Italia’s share capital is held by a diverse range of Italian banks and other financial institutions as well as by the Italian state
Vaccciano also confirmed that in the vault they saw some South
African gold bars, many American gold bars, and “several bearing the
Nazi eagle”. And in a similar way to the RAI reporter Alberto Angela,
who said in 2010 that he was speechless when viewing the gold in the
sacristy, Vacciano says:
“from a purely human perspective, we
could see with our own eyes a quantity of precious metal that goes
beyond an ordinary perception … I must say that arouses feelings that
are difficult to explain“.
Italian Citizens
The Italian business community and public appear to be quite aware of
the importance of the country’s gold reserves. In May 2013, the World Gold Council conducted a survey of Italian business leaders and citizens
which included various questions about the Italian gold reserves. The
findings showed that 92% of business leaders and 85% of citizens thought
that the Italian gold reserves should play an important role in Italy’s
economic recovery. There was very little appetite to sell any of the
gold reserves, with only 4% of both citizens and business leaders being
in favour of any gold sales. Finally, 61% of the business leaders and
52% of the citizens questioned were in favour of utilising the gold
reserves in some way without selling any of them. The World Gold Council
interpreted this sentiment as allowing the possibility for a future
Italian gold-backed bond to be issued with Italian gold as collateral.
The Italian gold could thus play a role similar to that used to
collateralise the international loans from West Germany to Italy in the
1970s.
Mario Draghi – Last Word
For now, the last word on the Italian goes to Draghi. Even Mario
Draghi, former governor of the Banca d’Italia, and current president of
the European Central Bank, has a similar view to the Italian public
about not selling the Italian gold. In the video below of a 2013 answer
to a question from Sprott’s Tekoa Da Silva, Draghi says that he never
thought it wise to sell Italy’s gold since it acts as a ‘reserve of
safety’. However, as would be expected from a smoke-and-mirrors central
banker, Draghi doesn’t reveal very much beyond generalities, and
certainly no details of storage locations or whether the Italian gold
comprises gold receivables as well as unencumbered gold.
