Besides seizing deposits from account holders of the Popular Bank of Cyprus, Nicosia will also sell the bulk of its gold holdings as its contribution to the international bailout. The sale, which comes at a time that gold prices are down, aims to raise €400 million.
Cyprus needs to raise €23 billion between the 2nd quarter of 2013 and 1st quarter of 2016. Of this amount, the Euro Zone Bailout Fund will provide €9 billion, the International Monetary Fund €1 billion and Cyprus will generate €13 billion.
To reach the €13 billion goal, Nicosia expects to raise €10.6 billion from the closure of Laiki Bank and another €600 million over three years by increasing the corporate income tax and capital gains tax rates.
The Cyprus financial crisis is partly responsible for the decline in gold prices, now down 1.65 per cent to $1,559 a troy ounce. Businessman George Soros blamed the euro crisis for removing the safe haven tag of the yellow metal.
To raise the targeted €400 million, Cyprus must sell 10 tonnes of gold, leaving the country's central bank with just 3.9 tonnes. The central bank's gold holdings, though, account for only 62 per cent of the country's official reserves, the World Gold Council said.
The selling of gold by central banks to address financial gaps may set a trend for other troubled eurozone members. But in the case of Italy and Portugal, the two countries have substantial gold holdings. Italy's central bank has 2,451 tonnes of the yellow metal and Portugal holds 383 tonnes. It is equivalent to 70 and 90 per cent, respectively of their total reserves.
During the Asian financial crisis in 1997-98, South Korea asked its citizens to donate their jewelry to the central bank to help build up its gold holdings.