Cross cancellation of debt between countries - Politics Forum.org | PoFo

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#13716965
I came across this article this morning. However, the writer seems to be one of these Austian economics types, and as I understandd, they're not respected among academic economists.

Thoughts?

LINK wrote:
How much EU debt can be written off through cross cancellation?Anthony J. Evans 23 May 11

Consider this diagram showing the billions of euros that each of 8 EU countries owes the other.


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Whilst the numbers are far from perfect, they give a clear understanding of the extent to which EU debt obligations are interlinked. But why try to raise money to pay someone off if they owe you even more? Why not cross cancel the debts and be left with the difference?

To see how this might work I recently ran a classroom simulation where students did precisely that. After three trading rounds they had managed to generate the following results:

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

The final picture demonstrates the scope for cross cancellation. It is hard to see how such a policy would be possible, let alone desirable, but as a pedagogical exercise I think it is worth consideration. For those interested in more details I have set up a website: http://www.eudebtwriteoff.com. You can also download the full report: The Great EU Debt Write Off (.pdf)

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By Rilzik
#13716967
While I am anything but an expert or even amateur in this kind of thing, I would imagine because all the different interest rates for the thousands of different loans that make up each countries debts. Sound interesting though and if the US can seem to erase 1 Billion of Egyptian debt magically...

maybe they have obligations to the banking firms that are handling the debt?
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By Nets
#13717472
Wait but private banks hold most of the debt, not central banks? How does this work?

Debt is transferred from a foreign bank to a domestic bank? Transferring the debt doesn't retire it. Japan owes virtually all of its (200% of GDP) national debt to its own citizens, but it is not as if the debt doesn't exist.
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By Pleb
#13717479
Nets wrote:Wait but private banks hold most of the debt, not central banks? How does this work?

Debt is transferred from a foreign bank to a domestic bank?


That's not the case in Ireland, banking debts have all been transfered to the Irish central bank. And Greece's debts are sovreign as are Portugal's. If Spain requires a bailout, that will be the case for them also

On the graph there, Ireland owes Germany. €81.53b and Germany in return owes Ireland €49.56b. They don't really explain what this debt is though. I've just read through the full paper - linked as a pdf - and it doesn't make me any wiser.

There's a paper in London. City Am. It's a finacial tabloid, the editor is one of these crusaders for liberty. He name dropped this 'study' in an editorial today, so I wanted to see what PoFo thinks. I find it confusing. What is the money that Germany owes Ireland? Is this Irish investors buying German government bonds? Are they equating that kind of debt with the bad mortgage debt that Ireland owes Germany? Can such a thing be done?

Transferring the debt doesn't retire it. Japan owes virtually all of its (200% of GDP) national debt to its own citizens, but it is not as if the debt doesn't exist.


Sure, but if there was similar size debt going the other direction- say tax deficit or whatever, they could call it even, no? That's the premise of this article, that there are similar size debts ogoing in both directions. But they haven't made clear what they mean by this debt.
By lucky
#13717641
But if you are both a debtor and a creditor you do not need money to settle claims. Rather than require additional funds to deal with choking debt, why not write it off?

Nets is right. This doesn't make any sense, since we're not talking about a single entity being "both a debtor and a creditor". Just look at their source: "banks and governments owe each other".

Besides, even if it was true that it's just governments buying each other's bonds, then that part of the debt that you could cancel out would not be
suffocating the European economy
since the interest costs would be exactly covered by the interest revenues. There is no magic income from some "negotiation" about "cross cancelation of debts" if the debts are already canceling each other out.

Then the article describes some nonsense class activity, "the simulation" of that "negotiation", as if there is something to simulate and negotiate about adding up positive and negative numbers.
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By Pleb
#13717858
lucky wrote:Then the article describes some nonsense class activity, "the simulation" of that "negotiation", as if there is something to simulate and negotiate about adding up positive and negative numbers.

:lol:

Thank you for the replies. I will cease reading this silly newspaper
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By Negotiator
#13732305
Well ... public debt is necessary.

If one would actually, say, nationalize all banks and the debt would be canceled out, this would remove massive amounts of money, resulting in massive deflation and in another crisis.

That is the craziness of our current money system: the sum of (negative) debt and (positive) money is zero. So if there is more money needed, more debt has to be generated.

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