Wednesday, April 20, 2011
How Italy tricked its entry into the Euro
The recent gold price escalation and the possible manipulation of the gold market has some interesting similarities with the LTCM collapse which risked in 1998 to derail Italy’s qualification for the Euro.
LTCM was a hedge fund founded by bond guru John Meriwether which suffered a spectacular collapse in 1998 and was subsequently bailed out by consortium of banks at the behest of the U.S. Treasury and Federal Reserve. Fed and Treasury officials argued at the time that the bailout was necessary because the collapse of LTCM posed systemic implications for the global financial system. Here’s why:
When sovereign gold is lent / leased – it is generally sold into the market to raise cash balances.
The Italians were lending / leasing their sovereign gold and investing the proceeds with LTCM. Italy was no doubt attempting to reverse their sagging fortunes with their substantial sovereign gold holdings due to the reality that their gold holdings were only losing value over that time frame.
The declining gold price was effectively preventing Italy from qualyfing for the Euro by negatively impacting the value of their reserves.
This would have made the Italians highly agreeable to any proposal to help reverse or alleviate that reality.
Thinking that LTCM was infallible – owing to them having a couple of Nobel laureates on staff and also being predisposed to playing fast-and-easy with their gold accounts – Italy still wasn’t done. Next up was a gold loan / lease – arranged by bullion bankers [like Goldman Sachs]. The proceeds were invested in LTCM in the belief they would earn the ‘magical gains’ that LTCM had been delivering to their investors.
When LTCM failed, they had to be bailed out because a public bankruptcy would have:
A] exposed the Italian manipulation of their sovereign gold [which did aid and abet in a wider – globally coordinated – gold price suppression]
B] that Italy was playing “financial accounting tricks” to qualify for the Euro
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