Ecuador agreed to transfer more than half its gold reserves to Goldman Sachs Group Inc. for three years to give the government easier access to cash.
The central bank said it will send 466,000 ounces of gold to Goldman Sachs, worth about $580 million at current prices, and get the same amount back three years from now. In return, Ecuador will get “instruments of high security and liquidity” and expects to earn a profit of $16 million to $20 million over the term of the accord. The central bank didn’t detail additional terms of the transactions, such as any fees or financing costs paid to Goldman Sachs.
The deal comes as the South American country’s government, which defaulted on about $3.2 billion of bonds five years ago, seeks to cover a budget deficit forecast by the Finance Ministry to swell to a record $4.94 billion this year. President Rafael Correa said in April he also planned to sell about $700 million of foreign debt this year in the country’s first international bond sale since the 2008 and 2009 default.
“Gold that was not generating any returns in vaults, causing storage costs, now becomes a productive asset that will generate profits,” the central bank said in the statement. “These interventions in the gold market represent the beginning of a new and permanent strategy of active participation by the bank, through purchases, sales and financial operations, that will contribute to the creation of new financial investment opportunities.”
Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment. Central Bank President Diego Martinez didn’t respond to requests made through the bank’s press office seeking more information on the transaction.
The country’s gold reserves fell by $605 million, or 55 percent, to $493 million in the week ending May 23, according to a separate report on the central bank’s website. The bank, which was stripped of its autonomy in a 2008 constitutional referendum, had about 845,000 troy ounces of gold as of April 14, according to data compiled by Bloomberg.
Last year, Goldman Sachs proposed a swap with Venezuela to provide $1.68 billion in cash to be backed by $1.85 billion of that country’s gold, documents obtained by Bloomberg News showed.
The deal, which wasn’t completed, would have carried an interest rate of 7.5 percent plus the three-month London interbank offered rate. Venezuela would have kept its exposure to gold, with the nation posting the precious metal or cash to a margin account if the price fell and Goldman Sachs posting U.S. dollars if it rose, the documents show.
Ecuador’s deal with Goldman Sachs is a signal the central bank is short on cash, Vicente Albornoz, the dean of the Universidad de las Americas business school in Quito, said in a telephone interview. The funds should help prop up government spending this year needed to drive economic growth.
“About the only thing that’s clear is that they’re converting part of their reserves into some sort of cash equivalent,” Albornoz said. “If the government doesn’t find funds to finance the deficit, it’ll have to cut spending.”