Econintersect: A classroom study in Europe has determined that there is a potential for lowering the average sovereign debt of seven eurozone countries plus the UK to an average of 15% of GDP. The countries involved in the study were, Germany, France, Spain, Italy, Portugal, Ireland, Greece and UK. The exercise involved the hypothetical cross cancellation of debts of each country against debt it held of other countries in the group. The study determined that a large percentage of each country's sovereign debt was held by the seven other countries in the group.
This was a classroom exercise and the mechanics of actual operations were not explored. The students did restrict themselves to using only apples-for-apples exchanges using identical maturities, for example.
Here is the abstract for the paper:
When one economic entity is both a creditor and debtor to another, a somewhat obvious and simple idea is to cross cancel their debt. We created a classroom simulation where students were required to research the debt position of 8 EU countries (Portugal, Ireland, Italy, Greece, Spain, Britain, France and Germany) and then conduct a negotiation exercise to reduce their total debt burdens. As a result students developed their research skills and data analysis, and increased their understanding of the data regarding an important topical issue. The simulation itself exposed students to a number of different trading strategies, in particular the complexity of going from bilateral to wider deal making, and negotiating from weak positions. By making students the focus of the exercise their engagement and learning outcomes were high.
The "before" and "after" web of debt diagrams show the dramatic results of the study. (Click on graphics for larger images.)
Current Web of Debt ("Before")
Web of Debt Following Hypothetical Exchanges ("After")
- The Great EU Debt Write Off (Anthony J. Evans and Terrence Tse, Social Science Research Network, 24 August 2012)
Hat tip to Public Banking Institute.