The Great EU Debt Write Off

Dont be at yourself

http://www.eudebtwriteoff.com/

This website presents the results of a simulation conducted by students at ESCP Europe Business School. The aim was to uncover the amount of interlinked debt between Portugal, Ireland, Italy, Greece, Spain, Britain, France, and Germany; and then see what would happen if they attempted to cross cancel obligations.
The results were astounding:

The countries can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58%
Six countries – Ireland, Italy, Spain, Britain, France and Germany – can write off more than 50% of their outstanding debt
Three countries - Ireland, Italy, and Germany – can reduce their obligations such that they owe more than €1bn to only 2 other countries
Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP
France can virtually eliminate its debt – reducing it to just 0.06% of GDP

Is this just moving money around that nobody actually has? Deck chairs on the titanic? Or would it actually improve our situation?

antoobrien

The catch is the assumptions being made - that the debts are owed to governments (which may or may not be true).

Scofflaw

antoobrien wrote: »

The catch is the assumptions being made - that the debts are owed to governments (which may or may not be true).

Given they've used the BIS figures, it's almost certainly utterly wrong. Honestly, everyone uses those figures because they're the only single set of figures which have the form "country X owes country Y...", but not one commentator in a hundred bothers their head about what's actually being recorded. A case of "I need figures for debts between countries...hey, here are figures with debt and countries, kewl!".

I mean, seriously, these are bank statistics, not sovereign debt:

The locational banking statistics gather quarterly data on international financial claims and liabilities of bank offices in the reporting countries. Total positions are broken down by currency, by sector (bank and non-bank), by country of residence of the counterparty and by nationality of reporting banks. Both domestically owned and foreign-owned banking offices in the reporting countries record their positions on a gross (unconsolidated) basis, including those vis-à-vis own affiliates in other countries. This is consistent with the residency principle of national accounts, balance of payments and external debt statistics.

To use them for something like this is completely pointless except as an intellectual exercise in how you might go about doing the same thing if you'd bothered your hole finding the right figures to start off with. To claim that they have some genuine meaning in terms of the sovereign debts of the countries involved suggests only that you should be very wary of employing graduates of the ESCP Europe Business School in any capacity where statistical literacy is a necessity. Careers in journalism all round, I think.

And even if you manage to get figures for sovereign debt holdings showing that "€x bn of country A's debt is held by country B" while "€y bn of country B's debt is held by country A", you'd have nothing useful in terms of setting one debt off against another because the debt isn't generally held by the countries, but by banks and other private institutions within those countries. Ireland can't turn round and say "hey, our banks hold €12bn of UK sovereign debt, and UK banks hold €6bn of Irish sovereign debt, why don't we just set them off against each other?" because what is actually happening there is that certain banks, who happen to be based in the UK and Ireland, hold €18bn of UK and Irish sovereign debt - there is nothing to "set off" against that holding.

Honestly, ffs.

/rant,
Scofflaw

Aka Ishur

To make it really simple-

They are using this statement -

Ireland owes Germany 25 bil but Germany owes Ireland 15 bil, therefore Ireland owes 10 bil and Germany is in the clear.

We are using this statement -

Anglo owes Deutchbank 25bil but Deutchbank owes BoI 15bil, therefore ....well Anglo owes Deutchbank 25bil and Deutchbank owes BoI 15bil.

No company is gonna take on anothers debts. Except Ireland Inc. we know we know....

Scofflaw

That this exercise has been carried out by a business school may not tell us anything about how we get out of the crisis, but it sure tells us a lot about how we got here.

cordially,
Scofflaw

eire4

http://www.eudebtwriteoff.com/


This article was very interesting I thought. I had been thinking along these lines before about why don't the EU countries just write off their debts against each other and thus just leaving the lower debt sums left over.

[MOD]Merged with existing thread.[/MOD]

andrew

Debt isn't held by countries, it's held by banks. German *banks* hold Irish debt, and Irish *banks* hold German debt (for example). So it's not as simple as the countries coming together and organising a write off; individual banks would still take a huge hit, even if the aggregate impact on the countries involved is what is outlined on that website. TBH, the site (and accompanying paper) seem more like an ad for that particular school, than a serious or viable proposal.

Slydice

ecb holds a bunch of our debt

Scofflaw

andrew wrote: »

Debt isn't held by countries, it's held by banks. German *banks* hold Irish debt, and Irish *banks* hold German debt (for example). So it's not as simple as the countries coming together and organising a write off; individual banks would still take a huge hit, even if the aggregate impact on the countries involved is what is outlined on that website. TBH, the site (and accompanying paper) seem more like an ad for that particular school, than a serious or viable proposal.

And, to be honest, a very poor ad for them, given that extremely fundamental flaw. It's one thing journalists not understanding the difference between public and private debt, or using the BIS stats without having a notion what they mean, but a Professor at a business school doing the same...

appalled,
Scofflaw

Shangoes

I think this actually has some merit, especially since there doesn't seem to be any other solutions floating about!
In addition to national debt, how many banks are owned or have shares held by the states.. AIB here, RBS in the UK and CGD in Portugal to name a few.
Also banks want to rid themselves of debt to improve the appearance of their books, so we may include them also.
The debt write off doesn't have to be direct either if there was central clearing house to coordinate this, actually the more indirect the better. If Bank A owes Bank B who owe Bank C who owe Bank A, a single key stroke could clear a large number of debts.
The better understanding of debts of the banks wouldn't be a bad thing and improve market confidence.

Diarmuid

Scofflaw wrote: »

That this exercise has been carried out by a business school may not tell us anything about how we get out of the crisis, but it sure tells us a lot about how we got here.

It tells us even more about the business school

Nody

Shangoes wrote: »

I think this actually has some merit, especially since there doesn't seem to be any other solutions floating about!
In addition to national debt, how many banks are owned or have shares held by the states.. AIB here, RBS in the UK and CGD in Portugal to name a few.
Also banks want to rid themselves of debt to improve the appearance of their books, so we may include them also.
The debt write off doesn't have to be direct either if there was central clearing house to coordinate this, actually the more indirect the better. If Bank A owes Bank B who owe Bank C who owe Bank A, a single key stroke could clear a large number of debts.
The better understanding of debts of the banks wouldn't be a bad thing and improve market confidence.

You're also ignoring such minor things such as interest rate differences, securities on the bonds, loans taken based on said debt, differences in duration etc.

Shangoes

Nody wrote: »

You're also ignoring such minor things such as interest rate differences, securities on the bonds, loans taken based on said debt, differences in duration etc.

Principle + (interest x duration) + value of securities to arrive at a total value for the loan? I'm in no way an economist and could be totally wrong but I haven't herd anything against it except "it's too simple."

andrew

Shangoes wrote: »

Principle + (interest x duration) + value of securities to arrive at a total value for the loan? I'm in no way an economist and could be totally wrong but I haven't herd anything against it except "it's too simple."

The argument against it is that governments don't own a majority of the Debt. Private entities such as (non nationalized) banks do. So to talk about 'Ireland' cancelling it's debt with 'Germany,' (as this suggestion does) as though each government owed the other government money, is wrong.

Shangoes

Just with a quick search, RBS is the bank with the largest holding of Irish sovereign debt, about €3/4bn. The UK government owns 83% it.

http://businessetc.thejournal.ie/rbs-most-exposed-bank-to-irish-debt-2010-10/

Scofflaw

Shangoes wrote: »

Just with a quick search, RBS is the bank with the largest holding of Irish sovereign debt, about €3/4bn. The UK government owns 83% it.

http://businessetc.thejournal.ie/rbs-most-exposed-bank-to-irish-debt-2010-10/

There will be one or two other examples like that, I would think, but they won't add up to that much. And it's worth bearing in mind that the government can be legally prevented from doing a deal which isn't in the interests of the bank.

cordially,
Scofflaw