Goldman Gets Ecuador Gold as Correa Steps Up Cash Hunt

Ecuador, one of only eight countries to adopt the U.S. dollar as its official currency, swapped gold with Goldman Sachs Group Inc. for liquid assets in a sign the nation is short on cash, according to Loomis Sayles & Co.

“It does raise a red flag,” Bianca Taylor, a sovereign analyst who helps oversee $210 billion at Loomis Sayles, said yesterday in a phone interview from Boston. “Whenever a country needs to sell or monetize its gold reserves, it’s definitely a signal that the sovereign is strapped for cash.”

President Rafael Correa is stepping up his search for financing at home and abroad after borrowing more than $11 billion from China since defaulting on $3.2 billion of foreign debt five years ago. Ecuador’s use of the dollar means it can’t finance deficits by printing money like other countries. Correa, a self-described revolutionary socialist, is now planning to raise about $700 million in an overseas bond sale this year and agreed to allow the International Monetary Fund to perform an economic review for the first time since 2008.

Ecuador’s central bank, stripped of its autonomy in a constitutional referendum a year after Correa took power in 2007, says it “invested” the gold with Goldman Sachs in return for assets that can be liquidated within seven days. The country will get the same quantity of gold back three years from now and expects to earn a profit of $16 million to $20 million from the deal, it said.

Productive Asset

The operation didn’t imply any payment of financing costs by the central bank to Goldman Sachs, the bank said today in an e-mailed response to questions from Bloomberg News. The central bank said it also doesn’t need the liquidity to finance spending.

“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 on its website disclosing the operation. “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.”

The Finance Ministry said yesterday the deal wasn’t a sale and was a normal operation of investing reserves for profit.

Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment.

‘Puzzling Transaction’

The transaction covers 466,000 ounces of gold, according to the central bank. That’s 1,165 gold bars, worth about $580 million at yesterday’s prices.

A clue to the operation came last week, when the central bank reported a $605 million drop in its gold reserves to $493 million during the week ending May 23. Net currency reserves rose by $434 million. At the time the central bank didn’t explain the change.

It’s not clear what Goldman Sachs plans to do with the bullion, said George Gero, a vice president and precious-metals strategist in New York at RBC Capital Markets.

“It’s really a puzzling transaction,” Gero said yesterday in a telephone interview. “The idea that there was a large sale and you don’t know when it will come out into the market is probably pressuring prices.”

Venezuela Proposal

Spot gold prices had fallen for five straight days before today, when they rose 0.1 percent to 1,244.96 an ounce as of 2:31 p.m. in New York. They’re still down 34 percent from a peak of $1,900.20 an ounce in September 2011. Prices have gained 3.6 percent so far this year and will fall to $1,240 by the end of the year, according to the median estimate of 34 analysts surveyed by Bloomberg.

Money managers cut their net-long position, or bets on higher gold prices, by 24 percent in the week ended May 27, based on U.S. Commodity Futures Trading Commission data. Short holdings, or bets on a gold-price decrease, surged 72 percent, the most in six months, the data show.

Last year, Goldman Sachs proposed a swap with Venezuela to provide $1.68 billion in cash to be backed by $1.85 billion of 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 transaction with Goldman Sachs “has nothing to do” with the proposed Venezuelan deal, the central bank said in its e-mail today.

Financing Options

Ecuador will probably use the transaction proceeds to finance public spending, said Martin Castellano, a senior economist for Latin America at the Institute of International Finance, a trade association of banks and money managers including Goldman Sachs. Given the country’s use of the greenback as its official currency, the government needs to ensure it has enough liquidity to avoid balance-of-payment problems, he said.

“The measure reflects the government’s willingness to pursue whichever financing option is at hand in order to avoid a fiscal adjustment,” Castellano said yesterday in a telephone interview from Washington.

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