
The Great EU Debt Write Off (2012) - severine
http://econ.anthonyjevans.com/2012/08/eu-debt-write-off/
======
Lazare
> The idea is very simple – if Portugal owes Ireland €0.34bn of short term
> debt, and Ireland owes Portugal €0.17bn

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.

~~~
Niksko
The author is a professor of economics at what is apparently the oldest
business school in Europe, and is apparently also one of the most prestigious
business schools in France.

Despite this, you have concluded that in fact the author has failed to
understand the nuance of the situation rather than yourself.

~~~
Lazare
> you have concluded that in fact the author has failed to understand the
> nuance of the situation rather than yourself.

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?

~~~
dalbasal
This is pure paranoia.

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.

~~~
close04
That's not paranoia. He misunderstood what this is about, jumped to
conclusions, and now can't backtrack. Notice how _Lazare_ started by rejecting
the validity of the exercise as:

> _" 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.

------
OJFord
Reminds me of the joke, probably with many variants:

> 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.

~~~
auntienomen
This isn't a joke. It's a parable about the velocity of money. ;-)

~~~
nordsieck
This has very little to do with the velocity of money.

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.

~~~
lolc
Unless you are paying a third party for the debt.

------
mrfredward
Clicking the link with no prior context, I read this as being purely an
economics lesson. And as an econ lesson, none of it makes any sense because
most government debts are owned by banks and citizens, not other governments.

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.

~~~
repolfx
Why is it described as "policy-relevant" if it's not meant to be about the
real world? Economists don't control policy. If they think it's policy-
relevant what they mean is, the exercise is intended to train economists to
make misleading claims to politicians!

------
SuoDuanDao
When it says that 'countries own debts' do they mean that governments own
other governments' bonds or that citizens own other countries' bonds?

~~~
sonnyblarney
It's totally unclear and for some reason I seriously doubt governments are
lending to other governments and borrowing at the same time.

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.

~~~
JumpCrisscross
> _I seriously doubt governments are lending to other governments and
> borrowing at the same time_

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](https://www.yardeni.com/pub/target2.pdf)

[2]
[https://www.euromoney.com/article/b12kjh8s0kpncx/target2-pay...](https://www.euromoney.com/article/b12kjh8s0kpncx/target2-payment-
system-gives-ecb-a-100-billion-reason-to-keep-greece-in-euro)

~~~
ringbugger
> But they aren’t really debts intended to be paid back

They are intended to be equalized at some point.

~~~
21
That point always being 30 years away.

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.

------
1996
Tragedy of the commons means it won't happen

