> 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.
“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.
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.
> 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?
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.
That's not paranoia. He misunderstood what this is about, jumped to conclusions, and now can't backtrack. Notice how Lazare started by rejecting the validity of the exercise as:
> "absurd assumptions with no bearing on reality"
But the argument suddenly turned into rejecting the credibility and motivation of the person proposing it as:
> "making a misleading graph to advance a political argument".
Also while his "demonstrations" kinda' sorta' make sense when viewed from the plane, it's the details that are completely off that give away that there's no formal knowledge or training behind them but a mish-mash of ideas probably gathered from the media, internet, and his personal conclusions and assumptions.
The whole line of reasoning for this discussion is that all physics problems that assume the ideal gas, the perfect sphere, etc. are unrealistic, so they are political statements. Don't feed the troll.
> 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 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.
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.
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.
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.
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)
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.
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.
No a Greek-issued euro debt instrument would become a new currency decoupled from the euro with a floating exchange rate if Greece left the euro, for example. That’s what all the hooplah a few years back was about.
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.
This has very little to do with the velocity of money.
It's a lesson on the benefits of the securitization of debt. If people could have traded their debt, they could have zeroed out the whole thing without the Germans.
Honestly, there isn't that much benefit from this story. Everyone in the story went from a net $0 net worth to a net $0 net worth. I'm sure clearing debts (or credits, depending on your perspective), from the books does benefit people, particularly psychologically, but the idea that everyone became massively better off is pretty silly.
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.
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!
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.
> 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].)
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.
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.