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Can a Sovereign Debt Jubilee Work for the Eurozone?

May 28, 2011 7 comments

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.

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