Is it possible for Greece to sell its gold reserve?

The Greeks said “OXI” to the austerity measures proposed by the creditors. The country has released a payment to the IMF, becoming the first developed country to boast such an achievement. The Greek banking system has been on a “bank holiday” for the second week, and the markets are anxious about the outcome of the current crisis.

In all the hubbub, few analysts pay serious attention to Greece's official gold reserves. How much gold does our southern neighbor own? Where does it store it? Are there any special clauses regarding Greek gold in the already signed bailout programs? What will happen to the country's gold reserves in the event of a possible bankruptcy? How does all this affect the price of the precious metal?

How much gold reserve does Greece have?

From the 2014 annual financial report of the Central Bank of Greece (CBG), it can be seen that the bank holds “ gold and gold receivables” worth 4.720 billion euros, which at a price of 987.769 euros/ounce (as of 31.12.2014) represents 148 tons of gold. Of these 148 tons, nearly 30 tons represent the withdrawal of CBGs by the Greek government related to a mandatory contribution to the IMF that each member state must make. Considering that Greece has been a member of the IMF since the organization’s inception in 1945, part or all of the obligation may date back to that time and it is strange that it is still present on the CBG’s balance sheet. Moreover, given the state of Greek finances, it is unlikely that this obligation will ever be repaid. From the full report for 2013 It is clear that about 5 tons are in the form of non-international standard gold (mostly coins).

Note that the remaining nearly 113 tons of gold (148-30-5) are also “ gold and gold receivables”. Unfortunately, it is not known how much of this is physical gold and how much is gold receivables, bearing the risk of the other party not fulfilling its obligation. This is due to the vicious practice of central banks not reporting the two positions on a separate line. To put it mildly, strange accounting standards that central banks (with few exceptions) take advantage of.

Where does Greece store its gold reserves?

It lacks official information on how much of these 113 tons of reserves are located on Greek territory and what in other jurisdictions. The explanatory notes to the full report for 2013 only mention that “ a large part is stored outside the country”. On March 1, 2013, Bloomberg published an article about an official letter from the Central Bank of Greece to the Greek Ministry of Finance, in which the bank claims that half of the monetary gold is stored in Greece, and the rest is distributed between the Federal Bank of New York, the Bank of England and Switzerland. The information was later confirmed by the Greek Foreign Ministry. Which means that a little over a year ago the distribution of the gold reserve was 50/50, but since then it may have changed radically.

That Greece uses the Federal Reserve Bank of New York and the Bank of England to store its gold is not surprising, given the importance of both destinations for the gold market. Gold stored in Switzerland can be located either 1) at the Bank for International Settlements in Basel, or 2) at the Swiss National Bank in Bern, or 3) in a private bank such as Credit Suisse or UBS in Zurich.

Wherever and however the 113 tons of gold reserves are distributed, it remains a mystery whether they are in segregated accounts with marked and set aside bars that meet international standards. It is not unlikely that the gold is in the form of a lease or swap transaction, but the GNB does not provide such detailed information. Given the state of Greek finances, the answer to this question is not unimportant.

Is it possible that if Greece goes bankrupt, its gold reserves could be confiscated?

В споразумението между Европейския Фонд за Финансова Стабилност(ЕФФС), правителството на Гърция и Гръцката Централна Банка(ГЦБ) е посочено, че последните две институции губят имунитет срещу конфискуване на техни активи във връзка с неизпълнение на подписаното кредитно споразумение. В същия документ е посочено, че разногласията между двете страни ще се решават спрямо Английското законодателство в съдилища в Люксенбург:

„The Beneficiary Member State and the Bank of Greece hereby irrevocably and unconditionally waive all immunity to which each of them is or may become entitled, in respect of itself or its assets, from legal proceedings in relation to this Agreement, including, without limitation, immunity from suit, judgment or other order, from attachment, arrest or injunction prior to judgment, and from execution and enforcement against its assets to the extent not prohibited by mandatory law“

In February 2012, during the negotiations for the second bailout for Greece, the New York Times published an article in which Luca Cazzetti, former Social Minister of Greece, expressed his dissatisfaction with these conditions, as well as the fact that creditors could confiscate the country's gold reserves.

In practice, the case is not a precedent. In the deal for the rescue plan for the Cypriot banking sector in 2013, the Cypriot gold reserve and the sale of 400 million euros of monetary gold were explicitly mentioned :

„27. The “programme” scenario takes into account a number of policy measures to strengthen debt sustainability, in particular (i) proceeds generated by privatisation of state-owned assets; (ii) the proceeds from the sale of excess gold reserves owned by the Republic of Cyprus;

29. Sale of excess gold reserves: It is envisaged to use the allocation of future central profits of approx. EUR 0.4 bn, subject to the principle of central bank independence and provided such profit allocation is in line with CBC rules and does not undermine the CBC duties under the Treaties and the Statute . This is estimated to generate one-off revenues to the state.“

It is necessary to emphasize that in both the case of Cyprus and the case of Greece there are parts of the text that introduce a certain conditionality over the complete lack of immunity of the central banks of the two countries (see the bold font of the quotes) before the creditors. An important point, considering that the protocols of the European System of Central Banks (ESCB) and the ECB guarantee the ECB and the central banks of the EU countries absolute independence from their local governments. Nevertheless, taking into account the actions of the ECB and the ESCB at the moment, a little skepticism regarding the "independence" would not be superfluous.

The Central Bank of Cyprus never sells its gold. However, speculation during the crisis in April 2013 about a possible sale brought additional weakness to the price of gold.

Cyprus still holds 13.9 tons of gold , which, like Greece, could pay off a small portion of the country's debt, but could cause significant price volatility. Given that Greece's gold reserves are about 8 times larger than Cyprus's, who knows what the effect on gold prices would be if a sale were to occur (as unlikely as it may seem at the moment).

Greek gold, the Central Bank and the ECB

On the assets side of the balance sheet, the Central Bank of Greece has an item “ Claims equivalent to the transfer of foreign exchange reserves to the ECB” in the amount of EUR 1.178 billion. This item represents a contribution that each country must make to the ECB upon entering the euro area. The contribution is determined by a formula that takes into account the population and GDP of the member country. Currently, the international reserves transferred by national banks to the ECB amount to EUR 40.309 billion and Greece is entitled to 2.905% of them, i.e. EUR 1.178 billion. Of these, 85% are in foreign currency, the remaining 15% are in gold.

Therefore, the GSB has a gold claim of 176 million euros (15%*1.178 billion) or approximately 5.5 tons of gold. When leaving the eurozone, will the GSB have the right to return this gold or will the ECB cover its counterclaims from the GSB? An interesting case, considering that there is no established procedure by which eurozone member states can leave it.

The issue is even more interesting in the shadow of the ECB’s €100 billion exposure to the Greek banking system in connection with the provision of “ emergency liquidity assistance ”. Of course, liquidity assistance has long since become capital assistance. In practice, without it, Greek banks cannot meet the outflow of deposits in the system and are doomed to bankruptcy (typical of systems operating on the principle of fractional reserve). This is the reason why the Central Bank declared a “bank holiday” after the ECB stopped and did not want to raise the ceiling of emergency liquidity assistance a week ago for the first time. This does not change the fact that these nearly €100 billion are mainly secured by Greek securities, which may turn out to be, or more precisely, are, worthless.

Considering that the ECB is a net creditor to the GSB and there are no clear rules on what will happen if Greece leaves the eurozone, it turns out that Greece's gold reserve is at risk of being confiscated or the GSB may be forced to sell it.

The relationship between the Greek gold reserve and the price of gold

The experience of the Cyprus crisis (and other cases over the years) shows that rumors of a possible sale of large amounts of physical gold are unfavorable for the price of the precious metal. Of course, there is a gentleman's agreement between the ECB and most central banks in Europe to limit the sale of gold reserves , but in the world of central banking, exceptions are the rule.

In theory, the payment to the IMF of 1.55 billion euros that Greece failed to make could have happened if the country had sold part of its gold reserve (113 tons or 4 billion euros). The payment could also have happened if Greece had entered into a swap transaction (which we would never know about) with a large bank , i.e. to exchange gold for currency. Of course, here we are assuming that the GNB is completely independent of the Greek government and that any possible transaction with gold must be approved by the ECB) . Also, on the agenda is the question of whether the GNB physically owns the gold at all, i.e. whether it can even theoretically enter into such transactions.

Overall, the price of gold in euros should benefit from the uncertainty brought by the Greek crisis. But that's not the fundamental problem. The price of gold can go up, it can go down. The question is, isn't it cynical to value any asset with manipulated money in a system devoid of morality?

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