7 ms·

The Great EU Debt Write Off (2012)

81 points by severine 8y ago

1996 8y ago
Tragedy of the commons means it won't happen
SuoDuanDao 8y ago
When it says that 'countries own debts' do they mean that governments own other governments' bonds or that citizens own other countries' bonds?
- sonnyblarney 8y ago
  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 8y ago
    > 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-payment-system-gives-ecb-a-100-billion-reason-to-keep-greece-in-euro https://www.euromoney.com/article/b12kjh8s0kpncx/target2-pay...
    - ringbugger 8y ago
      > But they aren’t really debts intended to be paid back They are intended to be equalized at some point.
      - 21 8y ago
        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.
- jarfil 8y ago
  Unfortunately the file with data and sources is no longer available.
Lazare 8y ago
> 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.
- nutjob2 8y ago
  Exactly - who owns and owes these debts exactly? It's clearly not the same counterparties since they would have netted out their debt long ago, in an accounting sense if not in cash.
  - falsedan 8y ago
    I think the point is to simulate what trades are necessary for the same counterparties to be creditor and debitor for these loans/debts so precisely this could happen.
- Niksko 8y ago
  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.
  - King-Aaron 8y ago
    > Despite this, you have concluded that in fact the author has failed to understand the nuance of the situation rather than yourself. And thus, illustrates the current state of affairs on HN.
mrfredward 8y ago
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 8y ago
  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!
OJFord 8y ago
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.
- snarfy 8y ago
  Hopefully the prostitute produced some happiness.
  - GLjEI4YbnGD27LB 8y ago
    No no, the prostitute did not perform any labour in this tale, she had already worked beforehand, but then on credit.
- auntienomen 8y ago
  This isn't a joke. It's a parable about the velocity of money. ;-)
  - 8y ago
ForRealsies 8y ago
There is something so very unnatural in Human History with a collection of countries being tied to the same currency.

81 points by severine 8y ago

1996 8y ago

Tragedy of the commons means it won't happen

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

sonnyblarney 8y ago
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 8y ago
  > 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-payment-system-gives-ecb-a-100-billion-reason-to-keep-greece-in-euro https://www.euromoney.com/article/b12kjh8s0kpncx/target2-pay...
  - ringbugger 8y ago
    > But they aren’t really debts intended to be paid back They are intended to be equalized at some point.
    - 21 8y ago
      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.
jarfil 8y ago
Unfortunately the file with data and sources is no longer available.

Lazare 8y ago

> 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.

nutjob2 8y ago
Exactly - who owns and owes these debts exactly? It's clearly not the same counterparties since they would have netted out their debt long ago, in an accounting sense if not in cash.
- falsedan 8y ago
  I think the point is to simulate what trades are necessary for the same counterparties to be creditor and debitor for these loans/debts so precisely this could happen.
Niksko 8y ago
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.
- King-Aaron 8y ago
  > Despite this, you have concluded that in fact the author has failed to understand the nuance of the situation rather than yourself. And thus, illustrates the current state of affairs on HN.

mrfredward 8y ago

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 8y ago
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!

OJFord 8y ago

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.

snarfy 8y ago
Hopefully the prostitute produced some happiness.
- GLjEI4YbnGD27LB 8y ago
  No no, the prostitute did not perform any labour in this tale, she had already worked beforehand, but then on credit.
auntienomen 8y ago
This isn't a joke. It's a parable about the velocity of money. ;-)
- 8y ago

ForRealsies 8y ago

There is something so very unnatural in Human History with a collection of countries being tied to the same currency.