The Great EU Debt Write Off (2012)
econ.anthonyjevans.com
econ.anthonyjevans.com
Yes, it's a simple idea. And the reality is even simpler; they don't owe each other those amounts. Rather, a large number of individuals are owed those amounts. If I, a private individual, own a $1k bond issued by Portugal, and you owe a $1k bond issued by Ireland, obviously we can't just say that sums to zero. Nor can we do so even if I happen to be in Ireland and you happen to be in Portugal.
This whole thing is a non-starter, grounded on the most absurd assumptions with no bearing on reality. If we're just going to make things up, why not just assume that all interest rates are zero; now the debt burden is totally manageable.
Despite this, you have concluded that in fact the author has failed to understand the nuance of the situation rather than yourself.
The above comment is merely an appeal to authority.
If there are facts that support it, I would love to see them posted here, so as to forward the discussion.
By no means; I'm sure the author is being purposefully misleading; I highly doubt it was mere accident. :)
In any case, your blatant appeal to authority is not needed; the linked article was kind enough to provide sources, and it's the work of a moment to check them.
"Overall gross external (or foreign) debt is taken from the latest 2011 World Bank/IMF figures and includes all debt owed overseas, including that owed by governments, monetary authorities, banks and companies."
Man, I guess just because you work for a prestigious business school you might not be above making a misleading graph to advance a political argument! Who knew?
> Students in the Pre-Masters Year of the ESCP Europe Masters in Management program took part in the trial run on March 22, 2011, which involved only the PIIGS countries. The key results were the following:
It's a student experiment
The "author" is conducting a learning exercise. There is no sign of a political argument, nevermind a political point here.
He's focusing on certain elements and not others because that's what he has data for, and that's what the exercise is about. The data he's got is bonds: bank bonds, government bonds & corporate bonds. That's what he's playing with, trying to see how this information can be unpacked, analyzed and understood. I haven't seen the actual exercise but I assume students might be able to do things like "how can we cancel the maximum debt with the minimum number of transactions?" The fact that this does not consider relative bond ratings, macroeconomic effects or whatever else you care about is a red herring.
Every economic model everywhere simplifies reality. Otherwise nothing is fungible/general and nothing can be modelled.
You ascribing sinister motives is you being blinded by whatever you think is the important debate in economics.
> "absurd assumptions with no bearing on reality"
But the argument suddenly turned into rejecting the credibility and motivation of the person proposing it as:
> "making a misleading graph to advance a political argument".
Also while his "demonstrations" kinda' sorta' make sense when viewed from the plane, it's the details that are completely off that give away that there's no formal knowledge or training behind them but a mish-mash of ideas probably gathered from the media, internet, and his personal conclusions and assumptions.
The whole line of reasoning for this discussion is that all physics problems that assume the ideal gas, the perfect sphere, etc. are unrealistic, so they are political statements. Don't feed the troll.
It is a student project.. treat as no more.
1) There's a reason why an Portuguese pension fund might hold Irish debt rather than Portuguese debt; for example, wanting to hedge and diversify, earn higher returns, or have lower risks. Forcibly swapping the debt gives them an investment they didn't want, and doesn't really "make them whole".
2) It costs just as much to pay back a Portuguese pensioner who owns one of your bonds as an Irish one; this swap does nothing for government finances. Which is why this also is totally not the plan being discussed.
The article talks about "The countries can reduce their total debt..."; you're talking about reducing the exchange rate risk of the debt. There's no real overlap here.
https://dl.dropboxusercontent.com/u/31011519/EU%20Debt%20Wri...
My guess is that the largest majority of debt is held by ECB and the banks (e.g by Greece held in Germany) who had their own debts written off (e.g. Landes banks) or held at negative yields for a decade through quantitative easing.
The implication of your statements is that a significant portion of bonds are held by individuals, and yet my knowledge of the US market in 2008 would indicate that maybe 10% are held by non-institutional players.
Real US rates were negative for years 2009-2014, but maybe the ECB didn't do that, although I remember hearing they had.
No, mostly banks and other large institutions. The ECB only holds about 1/5 (2 trillion out of about 10 trillion).
First it's about a classroom expirement, not a monetary policy.
Second, the exercise is to learn about the exact things you two are speculating about.
This is a pedagogical, not practical, exercise:
“Aim. To give students experience of researching important data and to conduct a policy-relevant negotiation exercise. [1]”
Bob the Irishman owes Billy the Belgian €1 in 10 years at 9%; Guillaume the Belgian owes Shannon the Irishwoman €1 in 7 years at 3%. These obviously don't cancel out.
[1] http://journals.sagepub.com/doi/pdf/10.1177/1046878116645252
That's not too far off what happened in the relevant countries after the last financial crisis, but far enough off to make a big difference (e.g. it would defeat the purpose of leaving one or two "good" banks per country that did not get nationalized)
> It is a slow day in a little Greek Village. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt and everybody lives on credit.
> On this particular day a rich German tourist is driving through the village, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher.
> The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel.
> The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the taverna. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note.
> The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything. At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money and leaves town.
> No one produced anything. No one earned anything. However the whole village is now out of debt and looking to the future with optimism.
It's a lesson on the benefits of the securitization of debt. If people could have traded their debt, they could have zeroed out the whole thing without the Germans.
Honestly, there isn't that much benefit from this story. Everyone in the story went from a net $0 net worth to a net $0 net worth. I'm sure clearing debts (or credits, depending on your perspective), from the books does benefit people, particularly psychologically, but the idea that everyone became massively better off is pretty silly.
From the link to the journal article in the post: >Aim. To give students experience of researching important data and to conduct a policy-relevant negotiation exercise.
The blog post isn't bad because of the author isn't informed on economics. The author is a professor in the subject. The real problem is that the post never states its purpose, and misleads everyone to think this is an econ lesson. In actuality, it is a classroom exercise about international negotiation, and the toy economic model isn't supposed to have real world utility.
It would be easy to line the numbers up against reality to find out if this is private debt, public-to-private debt etc. (which I suspect it is), or some kind of public-to-public debt (which I doubt).
Also, all debt is not equal, the loans are on different terms with different amount of risk, so it's the value of the current bonds and market prices that need to be compared, not their face value.
TARGET2 balances are bilateral and cumulative [1]. But they aren’t really debts intended to be paid back, and more an EU payments system accounting side effect. (When Greece threatened exiting the Euro, calling these balances did come into question [2].)
[1] https://www.yardeni.com/pub/target2.pdf
[2] https://www.euromoney.com/article/b12kjh8s0kpncx/target2-pay...
They are intended to be equalized at some point.
To me, TARGET2 is a politically acceptable way for rich euro countries (Germany) to transfer money to the poor ones (Greece), in exchange for the poor ones accepting the fact that the rich countries deciding EU policies.