Gold-backed Giscard bond poses problems for French

A bond issued almost 15 years ago which is backed by a large amount of gold and which carries a Jan 16 redemption date is causing problems for the French government.

Six-and-a-half-million Giscard bonds at a par value of 1,000 francs were issued in 1973 with a 7% coupon. The French government guaranteed upon issue indexing of principal and interest against gold, which translates into the original 1,000-franc bond equal to about 8,910 francs ($1,566US) today.

(According to Shearson Lehman, the French government guaranteed that if the link between the franc and gold was interrupted before maturity, then the coupon and maturity value would both be linked to the gold price. In 1978, the International Monetary Fund broke with the gold standard.)

Assuming an average December gold price (as per the terms for redemption) of $465 per oz, each bond holder would receive 3.07 oz gold for principal and 0.215 oz for the 7% interest coupon. Total payment would be 56.34 billion francs or $992 million (or 620 tons gold for principal and 40 tons for interest), which represents about 4% of France’s national debt.

According to Shearson, every $5 change in the gold price (and gold has of late been flirting with $500) represents a change in total payment of 534 million francs.

What lies ahead, Shearson says, is the prospect of a massive surge in the French money supply in January (which will be worsened if the gold price continues to strengthen) or further weakening of the franc.

Those bond holders who have hedged by short gold sales will need to cover by Jan 16. And whether the bond is rolled over, gold or not gold-related, partly or fully redeemed, should put pressure on the franc.

In an update, Shearson says some of the pressure may have been lifted following a good response in November by holders who decided to tender their bonds at a redemption value of about $476, based on a 10-day average at end-October. On Oct. 29, gold was selling for about $15 below that price and heavy trading in the bonds was reported.