Anthony J. Evans and Terrence Tse • http://econ.anthonyjevans.com • August 24, 2012
This page 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
For more information download the full report: The Great EU Debt Write Off (.pdf).
The idea is very simple – if Portugal owes Ireland €0.34bn of short term debt, and Ireland owes Portugal €0.17bn, we can write off Ireland’s obligations and leave Portugal with a reduced debt of €0.17bn. 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?