7 ms·

> 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

by 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.
  - cinquemb 8y ago
    Wake me up when BNP or DB tap this author on the shoulder to help manage their derivatives book.
  - close04 8y ago
    That would be the state in which everyone thinks an internet connection and an audience makes them an expert?
- deleted 8y ago
  [deleted]
- voodootrucker 8y ago
  The grandparent included arguments relevant to the debate. The above comment is merely an appeal to authority. If there are facts that support it, I would love to see them posted here, so as to forward the discussion.
- Lazare 8y ago
  > 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?
  - raverbashing 8y ago
    > The diagrams above show the before and after situation, based on analysis done by students. The simulation itself took place on May 17th 2011 and involved three separate trading rounds. > Students in the Pre-Masters Year of the ESCP Europe Masters in Management program took part in the trial run on March 22, 2011, which involved only the PIIGS countries. The key results were the following: It's a student experiment
  - dalbasal 8y ago
    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.
    - 8y ago
- deleted 8y ago
  [deleted]
- zhte415 8y ago
  It isn't really about nuance. Cost and return of capital, convexity of yield curve spring to mind. It is a student project.. treat as no more.
jessedhillon 8y ago
In its most basic form, the plan would be that Portugal would stop paying Irish bondholders and vice versa. Each country would make the former creditors of the other whole from the payments it no longer makes.
- Lazare 8y ago
  That's an interesting idea, however note: 1) There's a reason why an Portuguese pension fund might hold Irish debt rather than Portuguese debt; for example, wanting to hedge and diversify, earn higher returns, or have lower risks. Forcibly swapping the debt gives them an investment they didn't want, and doesn't really "make them whole". 2) It costs just as much to pay back a Portuguese pensioner who owns one of your bonds as an Irish one; this swap does nothing for government finances. Which is why this also is totally not the plan being discussed. The article talks about "The countries can reduce their total debt..."; you're talking about reducing the exchange rate risk of the debt. There's no real overlap here.
  - Pamar 8y ago
    Maybe he is "alluding" at dismantling the Euro?
  - tonyedgecombe 8y ago
    There isn't even any exchange rate risk as both Ireland and Portugal are in the Euro.
    - deleted 8y ago
      [deleted]
    - garmaine 8y ago
      Nope; if a country leaves the euro it suddenly matters which banks’s name is on your debt notes.
      - tonyedgecombe 8y ago
kurthr 8y ago
It's interesting that you're so confident that it's impossible. How were those euro debts held by Ireland reduced by 97%? I'm going to assume you're an expert so it should be pretty obvious from the absurd source data they released. https://dl.dropboxusercontent.com/u/31011519/EU%20Debt%20Write%20Off.zip https://dl.dropboxusercontent.com/u/31011519/EU%20Debt%20Wri... My guess is that the largest majority of debt is held by ECB and the banks (e.g by Greece held in Germany) who had their own debts written off (e.g. Landes banks) or held at negative yields for a decade through quantitative easing. The implication of your statements is that a significant portion of bonds are held by individuals, and yet my knowledge of the US market in 2008 would indicate that maybe 10% are held by non-institutional players. Real US rates were negative for years 2009-2014, but maybe the ECB didn't do that, although I remember hearing they had.
- Lazare 8y ago
  > The implication of your statements is that a significant portion of bonds are held by individuals No, mostly banks and other large institutions. The ECB only holds about 1/5 (2 trillion out of about 10 trillion).
  - dalbasal 8y ago
    Did you guys look at the link? First it's about a classroom expirement, not a monetary policy. Second, the exercise is to learn about the exact things you two are speculating about.
    - kurthr 8y ago
      Yes, I looked at the link. But the claim (I was questioning) is that it's full of lies and absurdities to further political ends.
- deleted 8y ago
  [deleted]
JumpCrisscross 8y ago
> This whole thing is a non-starter This is a pedagogical, not practical, exercise: “Aim. To give students experience of researching important data and to conduct a policy-relevant negotiation exercise. [1]” Bob the Irishman owes Billy the Belgian €1 in 10 years at 9%; Guillaume the Belgian owes Shannon the Irishwoman €1 in 7 years at 3%. These obviously don't cancel out. [1] http://journals.sagepub.com/doi/pdf/10.1177/1046878116645252 http://journals.sagepub.com/doi/pdf/10.1177/1046878116645252
dmurray 8y ago
It becomes true if you permanently nationalize all the banks! Then virtually all the debt really is issued and owned by governments. That's not too far off what happened in the relevant countries after the last financial crisis, but far enough off to make a big difference (e.g. it would defeat the purpose of leaving one or two "good" banks per country that did not get nationalized)

by Lazare 8y ago

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.
- cinquemb 8y ago
  Wake me up when BNP or DB tap this author on the shoulder to help manage their derivatives book.
- close04 8y ago
  That would be the state in which everyone thinks an internet connection and an audience makes them an expert?
deleted 8y ago
[deleted]
voodootrucker 8y ago
The grandparent included arguments relevant to the debate. The above comment is merely an appeal to authority. If there are facts that support it, I would love to see them posted here, so as to forward the discussion.
Lazare 8y ago
> 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?
- raverbashing 8y ago
  > The diagrams above show the before and after situation, based on analysis done by students. The simulation itself took place on May 17th 2011 and involved three separate trading rounds. > Students in the Pre-Masters Year of the ESCP Europe Masters in Management program took part in the trial run on March 22, 2011, which involved only the PIIGS countries. The key results were the following: It's a student experiment
- dalbasal 8y ago
  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.
  - 8y ago
deleted 8y ago
[deleted]
zhte415 8y ago
It isn't really about nuance. Cost and return of capital, convexity of yield curve spring to mind. It is a student project.. treat as no more.

jessedhillon 8y ago

In its most basic form, the plan would be that Portugal would stop paying Irish bondholders and vice versa. Each country would make the former creditors of the other whole from the payments it no longer makes.

Lazare 8y ago
That's an interesting idea, however note: 1) There's a reason why an Portuguese pension fund might hold Irish debt rather than Portuguese debt; for example, wanting to hedge and diversify, earn higher returns, or have lower risks. Forcibly swapping the debt gives them an investment they didn't want, and doesn't really "make them whole". 2) It costs just as much to pay back a Portuguese pensioner who owns one of your bonds as an Irish one; this swap does nothing for government finances. Which is why this also is totally not the plan being discussed. The article talks about "The countries can reduce their total debt..."; you're talking about reducing the exchange rate risk of the debt. There's no real overlap here.
- Pamar 8y ago
  Maybe he is "alluding" at dismantling the Euro?
- tonyedgecombe 8y ago
  There isn't even any exchange rate risk as both Ireland and Portugal are in the Euro.
  - deleted 8y ago
    [deleted]
  - garmaine 8y ago
    Nope; if a country leaves the euro it suddenly matters which banks’s name is on your debt notes.
    - tonyedgecombe 8y ago

kurthr 8y ago

It's interesting that you're so confident that it's impossible. How were those euro debts held by Ireland reduced by 97%? I'm going to assume you're an expert so it should be pretty obvious from the absurd source data they released. https://dl.dropboxusercontent.com/u/31011519/EU%20Debt%20Write%20Off.zip https://dl.dropboxusercontent.com/u/31011519/EU%20Debt%20Wri... My guess is that the largest majority of debt is held by ECB and the banks (e.g by Greece held in Germany) who had their own debts written off (e.g. Landes banks) or held at negative yields for a decade through quantitative easing. The implication of your statements is that a significant portion of bonds are held by individuals, and yet my knowledge of the US market in 2008 would indicate that maybe 10% are held by non-institutional players. Real US rates were negative for years 2009-2014, but maybe the ECB didn't do that, although I remember hearing they had.

Lazare 8y ago
> The implication of your statements is that a significant portion of bonds are held by individuals No, mostly banks and other large institutions. The ECB only holds about 1/5 (2 trillion out of about 10 trillion).
- dalbasal 8y ago
  Did you guys look at the link? First it's about a classroom expirement, not a monetary policy. Second, the exercise is to learn about the exact things you two are speculating about.
  - kurthr 8y ago
    Yes, I looked at the link. But the claim (I was questioning) is that it's full of lies and absurdities to further political ends.
deleted 8y ago
[deleted]

JumpCrisscross 8y ago

> This whole thing is a non-starter This is a pedagogical, not practical, exercise: “Aim. To give students experience of researching important data and to conduct a policy-relevant negotiation exercise. [1]” Bob the Irishman owes Billy the Belgian €1 in 10 years at 9%; Guillaume the Belgian owes Shannon the Irishwoman €1 in 7 years at 3%. These obviously don't cancel out. [1] http://journals.sagepub.com/doi/pdf/10.1177/1046878116645252 http://journals.sagepub.com/doi/pdf/10.1177/1046878116645252

dmurray 8y ago

It becomes true if you permanently nationalize all the banks! Then virtually all the debt really is issued and owned by governments. That's not too far off what happened in the relevant countries after the last financial crisis, but far enough off to make a big difference (e.g. it would defeat the purpose of leaving one or two "good" banks per country that did not get nationalized)