Home > Main > Can a Sovereign Debt Jubilee Work for the Eurozone?

Can a Sovereign Debt Jubilee Work for the Eurozone?

May 28, 2011

This is one of the most interesting articles I’ve read about the crisis, How to destroy the web of debt.

The article makes a series of bold claims:

  • The Eurozone could reduce its overall debt to GDP ratio from 40% to 15% by canceling interlinked debt.
  • Ireland could reduce its debt/GDP from 130% to under 20%
  • 6 countries – Ireland, Italy, Spain, Britain, France, and Germany – can reduce their debt/GBP by over 50%
  • France can be virtually debt free, with 0.06% debt/GDP

In real world terms, what would be done is make a trade between countries for each others debt, and then just cancel the debt because in some real way, you can’t owe money to yourself.  So Ireland would trade with Greece – Ireland would give Greece its debt back in exchange for Greece giving Ireland its debt back.

Image from NYT

In some cases, it would require a three way trade. For example, look at the interaction of Ireland, Portugal, and Spain.  Portugal could reduce its debt by $80bn – or over 25% – just by netting out the debt it owes to Spain and Ireland with the debts owed among the countries.  Ireland would get a $40 bn reduction.

These are not trivial amounts of money.

All of this relies on the realization that the taxpayers are both the ultimate owners of the debt and the ultimate debtors.  German taxpayers owe a bunch of money to German pension funds, which are owned by German taxpayers.  The same idea can be applied across borders.

  1. Rufus Blooter
    May 28, 2011 at 10:19 am

    That is brilliant. It is like a trioptima unwind scaled to galactic proportions.

    • TC
      May 28, 2011 at 11:06 am

      lol! If it works on $10m, it works on $100bn

  2. Oliver
    June 1, 2011 at 9:45 am

    in some real way, you can’t owe money to yourself.

    Umm, in what way are the gvt. issued financial assets that you hold not some kind of obligation owed by you as part of society to yourself as an individual? They may be net assets to the private sector, but then the gvt.-private distinction is arbitrary too. What is government if not a representative of its people? We, the people owe ourselves all our money.

    The whole thing just seems like an exercise in shifting debt from foreign books onto local ones to ease the xenophobic moment inherent in much of the debt phobia. And if the jubilee actually aims at canceling the debt, that would either be akin to mass destruction of financial wealth or just some humungous intra-EU QE spoof. The problem surely is the lack of control over interest rates due to monetary non-sovereignty, not the amount of outstanding debt per se, no? Or am I missing something? Would German pension funds really be sitting on heaps of Greek debt if they yielded the same or less than German ones?

  3. Oliver
    June 3, 2011 at 3:21 am

    Judging by the silence, seems I missed something :-).

    • TC
      June 3, 2011 at 8:14 am

      Hi Oliver.

      Sorry about that. 🙂 This response got forgotten.

      I think you raise the big objection. These debts are owed by countries to specific individuals or institutions.

      I think the point of that article was that these banks and pension funds are insolvent if there is a writedown. Insolvent means they will be nationalized. But if we just admit this inevitable outcome, we can do a debt cancellation. If Ireland has to nationalize its banks due to a Greek default, and Greece has to nationalize its banks due to a Irish default, then they are both stuck with inflows and outflows that net out. They are only insolvent because they need to make these transactions. The overall effect will be zero on the balance sheet, but the act of making the transaction causes cascading problems.

      I wasn’t claiming this was a perfect solution. But it is “possible”, and it is better than the solutions they are proposing.

      As for the xenophobic response, it’s a yep. I don’t have much to say beyond that. When you create a currency that has no 1 entity with ultimate responsiblity, you’ll get fractures.

  4. Oliver
    June 3, 2011 at 10:49 am

    Thanks for the answer (didn’t mean to be pushy). I guess it’s a tough job keeping up with all the comments. But it’s certainly worth it when you do > like the site!

    • TC
      June 3, 2011 at 9:55 pm

      Thanks. I work hard at this silly thing.

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