Cyprus to dive into its gold reserves

By Emiko Terazono, Quentin Peel and Kerin Hope, FT.com

April 11, 2013 -- Updated 0319 GMT (1119 HKT)

(Financial Times) -- Cyprus has agreed to sell gold worth €400m from its reserves as a contribution to an international bailout, roiling the precious metal markets as investors feared it could set a precedent for other troubled eurozone countries.

Nicosia's plan to dispose of most of its gold holdings would be the first such sale by a country seeking international assistance since the Asian financial crisis in 1997-98, when South Korea asked the public to donate jewellery to the central bank for the good of the nation.

"I think this could be a turning point," said Jonathan Spall, director of precious metals at Barclays Capital. "Central bank stocks of gold which had looked to be ringfenced in the bailout process could now seemingly come in to play."

A draft bailout document seen by the Financial Times, said: "The Cypriot authorities have committed to sell the excess amount of gold reserves owned by the Republic."

The document also shows that losses imposed on junior debt-holders and uninsured depositors in Cyprus's two largest banks -- a condition of the €10bn EU/IMF bailout -- are now expected to raise €10.6bn rather than the €5.8bn originally envisaged.

The gold price, which has been weak on investor selling since the start of the year, was hit by the Cyprus news, dropping 1.65 per cent on the day to $1,559 a troy ounce.

Cyprus is the first euro member to sell its reserves in the three-year eurozone crisis. To raise €400m, it will need to sell just over 10 tonnes of the yellow metal of the 13.9 tonnes held by the central bank. The central bank's holdings account for 62 per cent of its total official reserves, according to the World Gold Council, the industry lobby group.

Governments in the eurozone's beleaguered southern periphery tend to hold a large part of their total foreign reserves in gold -- the Italian central bank holds 2,451 tonnes of gold, over 70 per cent of its total reserves, while Portugal's holding of 383 tonnes accounts for 90 per cent.

James Steel, precious metals analyst at HSBC in New York, said the Cypriot plan "has been a psychological blow to the market". "The market has taken a pretty hard tumble," he added.

However, one Cyprus official said the move was likely to be a "one-off". Some analysts said it would be unlikely for larger countries to turn to gold sales to reduce their debts.

The Cyprus programme now faces the hurdle of Germany parliamentary approval. It will be presented to a special meeting of the budget committee of the German Bundestag on April 16, and to a full plenary session of the parliament on April 18.

Parliamentary budget experts in Berlin were still studying the details on Wednesday, and one opposition official said that "there are still many questions to be answered" before the Bundestag vote.

The bail-out document - known as the debt sustainability analysis, paints a grim picture for the Cypriot economy, forecasting it will contract by a cumulative 12.5 per cent 2013-14. Public sector deby will peak at 126.3 per cent of GDP in 2015. The documents also warns of "downside risks" to the programme from a deeper than expected recession.

European central banks agreed in 1999 to limit their gold sales in an effort to prop up prices after the precious metal plunged to a 20-year low of $250 per troy ounce.

Since then, central banks have turned from net sellers to net buyers, lead by strong purchases in Asia. Last year, the so-called official sector bought the most gold in 48 years.

Additional reporting by Jack Farchy