Pan European Debt Write Off

Going Forward

Apologies if this has been covered before, the issue of European countries who both owe and are owed money from others instigating a mutual write off of these debts.

It's claimed that "Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP" and that we would "owe more than €1bn to only 2 other countries."

It was done as an academic "experiment" so may not work in the real world:

http://econ.anthonyjevans.com/2012/08/eu-debt-write-off/

On paper it appears plausible and functional, but would it artificially "skew" the system too much, or would it be a fresh start?

AlmightyCushion

It seems a bit simplistic. One thing it misses out on is that the debt would be issued at different rate. Germany, Britain and France would get better rates than Ireland and Greece. So if Germany owes up €5b and we owe Germany €5b it makes no sense for Germany to write off our debt for writing off their debt as they are essentially getting free money. It would actually cost them money in missed interest payments. The only reason to do it would be if they were worried we could default or to help ease borrowing on fellow trade partners and EU member states.

Also, I imagine most of the bonds aren't even owned by member states but instead by individuals or institutions (banks and pension funds) located in the country. If the member state doesn't own the debt directly then they can't write it off.

antoobrien

Yup this has been done before: http://www.boards.ie/vbulletin/showthread.php?p=75586880. This article is merely an update to the original project, that changes nothing to make it any more practical than it was.

AlmightyCushion wrote: »

Also, I imagine most of the bonds aren't even owned by member states but instead by individuals or institutions (banks and pension funds) located in the country. If the member state doesn't own the debt directly then they can't write it off.

The underlying "study" attempts to deal with that problem by ... ignoring it:

The main criticism of writing off interlinked debt is the policy relevance. Despite sovereign EU states being unique economic entities, the actual debt holdings are split between a sizable list of public and private sector organisations and indeed individuals. We have completely glossed over the fact there is no incentive for Deutsche bank (German) to write off their holdings of French government bonds purely to allow the Germany public sector escape their debt commitments to Society Generale (French). To some extent the feasibility of such an idea assumes that there is both a market meltdown and nationalisation of private banks to “merge” currently private sector debt. As one commentator pointed out to us, however, if you think this is implausible then you are implying that EU governments aren’t already backing private debt. If anything events have demonstrated that these debts are more “public” than is officially acknowledged.

Prof Evans, governments have tried very hard to keep this debt off the balance sheet, even then where it is there it's largely not "swappable debt".

recedite

AlmightyCushion wrote: »

Imost of the bonds aren't even owned by member states but instead by individuals or institutions....

Or in other words we are looking at the aftermath of a massive transfer of wealth from the public sphere to the private sphere. Which is ongoing due to the interest repayments on all the loans.
The taxpayer being fleeced by the bondholder.

shedweller

recedite wrote: »

Or in other words we are looking at the aftermath of a massive transfer of wealth from the public sphere to the private sphere. Which is ongoing due to the interest repayments on all the loans.
The taxpayer being fleeced by the bondholder.

Or it could be called "the elephant in the room"

AlmightyCushion

recedite wrote: »

Or in other words we are looking at the aftermath of a massive transfer of wealth from the public sphere to the private sphere. Which is ongoing due to the interest repayments on all the loans.
The taxpayer being fleeced by the bondholder.

The taxpayer is availing of a service. If the taxpayer doesn't want to avail of this service then they can just learn to live within their means and only use the bond market for financing short term fluctuations in tax receipts vs expenditure. Does it even matter who owns the bonds (private companies or member states)? It still costs Ireland money on interest repayments whether a German pension company or the German state owns Irish government bonds.

View

recedite wrote: »

Or in other words we are looking at the aftermath of a massive transfer of wealth from the public sphere to the private sphere.

If the public sphere had this "wealth" it wouldn't be borrowing money from the bond holders. It is the absence of such wealth that means governments are resorting to issuing bonds.

recedite

AlmightyCushion wrote: »

. If the taxpayer doesn't want to avail of this service then they can just learn to live within their means.

View wrote: »

If the public sphere had this "wealth" it wouldn't be borrowing money from the bond holders.

These same arguments were made by feudal overlords centuries ago.
They used to lend out land to the peasants, and then collect the harvest in payment. The system was rigged so that the peasants could keep just enough to eat and to sow another crop.

Then as now, each country contained a balance of both classes; peasants and their "benefactors".
Nowadays they have found something better than land, they control and manipulate the financial system. The peasants continue to work and be taxed.

AlmightyCushion

recedite wrote: »

These same arguments were made by feudal overlords centuries ago.
They used to lend out land to the peasants, and then collect the harvest in payment. The system was rigged so that the peasants could keep just enough to eat and to sow another crop.

Then as now, each country contained a balance of both classes; peasants and their "benefactors".
Nowadays they have found something better than land, they control and manipulate the financial system. The peasants continue to work and be taxed.

So, we should make lending illegal?

recedite

I have no objection to you lending something for profit when you are the rightful owner.
Private banksters do not rightfully own the money supply any more than feudal overlords owned the land. In practical terms they control it, but only through a similar "right of conquest".

AlmightyCushion

recedite wrote: »

I have no objection to you lending something for profit when you are the rightful owner.
Private banksters do not rightfully own the money supply any more than feudal overlords owned the land. In practical terms they control it, but only through a similar "right of conquest".

Your whole argument doesn't make a lot of sense. Your original point was that there is a transfer of wealth from the tax payer to private institutions in the form of interest payments. If the bondholder is a pension fund (a lot of bondholders would be) which is using its investor's money or a private individual who is using their own money then there is still a transfer of wealth. With your first post you would see this as the taxpayer being fleeced. With this post it seems you don't have a problem with that because it is their money.

Using the logic from this post, you would prefer the government to borrow from an individual using their own money at 10% than a bank at 2% which is just plain madness and would result in an even bigger transfer of wealth.

recedite

The ECB base rate is only 0.5%. If the ECB was allowed to issue credit at that rate directly to govt. it would make a huge difference to the economy.
They don't because of the credit default risk. They lend to banks instead. But when banks are bailed out by governments, it brings all the risk back home to the taxpayer, with none of the (low interest) benefits.
When things go well, banks syphon off the money privately.
When things go badly, they pass the debt on to the public.

Bondholders are just like private moneylenders; holders of cash charging high interest rates to other people who are really stuck for money.
Its rarely worth engaging private moneylenders (maybe if you had a surefire investment opportunity) and certainly you don't pay them back for a bad loan that they have made to a third party eg. Anglo Irish bank.

shedweller

I dont get why there is such an effort to stop us talking about (and therefore dealing with) the elephant in the room. The losses of private institutions were passed onto us under the guise of propping up the banks.
We get feck all from this; only eternal debt. And in the future, whenever we get to pay off the debt we'll find ourselves in another sticky situation. Although apparently it's better to not pay off a national debt.????? Who knew it would be more financially prudent for a country to perpetually pay interest on a loan??

antoobrien

AlmightyCushion wrote: »

Your whole argument doesn't make a lot of sense. Your original point was that there is a transfer of wealth from the tax payer to private institutions in the form of interest payments.

Indeed it's ignoring the fact that the wealth is already in the hands of private institutions, so this is not a transfer of wealth to private investors, but rather a consolidation assets vs liabilities to show the actual(net) wealth/debt levels of the parties involved.

recedite

Every interest payment, every recapitalization of a private banking institution, every bondholder bailout...
All new and ongoing transfers of wealth.

antoobrien

recedite wrote: »

Every interest payment, every recapitalization of a private banking institution, every bondholder bailout...
All new and ongoing transfers of wealth.

There is no transfer of wealth and those comments show the level of delusion with which the current economic situation is being viewed.

Interest payments are direct results of getting loans to pay for things that you cant afford => no transfer of wealth because there was no "wealth" to begin with or the loan would not have been needed.

The "recapitalization of a private banking institution" is a more effective way of keeping the country afloat than allowing said institution(s) to fail leaving no operating banks. Not only does this not mean a transfer of wealth (the banks are getting loans_, but it means that wealth is not transferred out of the accounts of the customers of said institutions.

Bondholder bailouts have not happened. What has happened is that bonds that legally could not be burned have been paid, as a direct result of legal contracts to repay money loaned by bondholders.

recedite

antoobrien wrote: »

Interest payments are direct results of getting loans to pay for things that you cant afford => no transfer of wealth because there was no "wealth" to begin with or the loan would not have been needed.

^^^ That is a truly bizarre statement.

The "recapitalization of a private banking institution" ......does this not mean a transfer of wealth (the banks are getting loans_,

That is equally bizarre. Maybe you think David Drumm is going to come back here some day with a massive cheque for the govt. to repay all the money his bank "borrowed" from the taxpayer?

antoobrien

recedite wrote: »

^^^ That is a truly bizarre statement.

The only thing bizarre is the fact that you don't realise that in order to loan money to somebody, wealth has to be amassed first. The payment of interest is a reward for allowing somebdoy else to use your wealth to amass wealth of their own.

recedite wrote: »

That is equally bizarre. Maybe you think David Drumm is going to come back here some day with a massive cheque for the govt. to repay all the money his bank "borrowed" from the taxpayer?

Would you like to clarify how bondholders have been bailed out, considering that in order to burn the senior bondholders, the depositors would have had to be wiped out first? The reason that anglo collapsed is that depositors got scared and pulled their unprotected money, which created the capital hole. The senior bondholders had to be paid in full (the junior ones lost up to 95% of their wealth, which was an actual transfer of "wealth" into Ireland) or all deposits in Anglo would have had to go. This would have caused a run on the other banks, as precedent would have been set, and presto we don't have banking system.

Like I said, there is a level of delusion, now I'll add denial, about what has happened and the fact that you see objective facts as bizarre beggars belief.

recedite

I don't know anyone who had a deposit account in Anglo. But any retail deposits could have been protected with a State guarantee, up to a certain amount, similar to that applied in Cyprus. Investors made a bad judgement call, why should the humble taxpayer cover their losses?

As for wealth, even a poor person can be subject to an outward transfer of wealth, such as through rent, mortgage interest, taxation etc.

If an ordinary citizen takes out a mortgage from a bank, the bank need not have accumulated that wealth in advance. The (private) bank issues the credit based on their reputation and by having a banking licence. The money supply gets expanded by the ECB, by the amount of the mortgage. As the middleman, the bank feels entitled to collect monthly interest payments on the newly created money.

antoobrien

recedite wrote: »

If an ordinary citizen takes out a mortgage from a bank, the bank need not have accumulated that wealth in advance.

Actually they do have to have "wealth" in advance, this is part of how they obtain a banking license in the first place.

It's not like I can just rock up to the CB with a fiver in my pocket ans apply for a banking license:rolleyes:

I suggest you go have a read of the Basel III regulations, you might find them illuminating.

recedite

antoobrien wrote: »

...in order to loan money to somebody, wealth has to be amassed first. The payment of interest is a reward for allowing somebdoy else to use your wealth....

If banks had to amass the money before lending it out, there would be no need for Basle3 requirements. They would have 100% capital ratios.

antoobrien

recedite wrote: »

If banks had to amass the money before lending it out, there would be no need for Basle3 requirements. They would have 100% capital ratios.

I notice that you totally ignored that the banks have to have wealth in order to lend, so now you've with to an equally unsupportable argument that because the banks can leverage their capital, they are transferring wealth.

I'll sleep comfortably tonight knowing that my job is safe from anyone that thinks that way.

recedite

antoobrien wrote: »

the banks have to have wealth in order to lend

So far you have used the word "wealth" interchangeably to describe money, capital and being rich.
If the bank has already lent out its own cash, and now holds a mortgaged deed instead, it can draw down more money from the ECB using the first mortgage as collateral.
Its a house of cards, not unlike someone who has fifty houses all on buy to let mortgages. That person is not truly wealthy until all the mortgages have been paid off. In the meantime, anything can happen.

When I say I have no problem with someone lending their own money for profit, I mean money that they have already earned and accumulated. I don't mean pie in the sky wealth.

antoobrien

recedite wrote: »

So far you have used the word "wealth" interchangeably to describe money, capital and being rich.

No, that would have been you when you stated that there has been a transfer of wealth out of "public" into "private" funds, when in there is no basis in fact for this statement.

Now consider this, the bodies that lends the banks money, the CB & ECB can not operate without having first gathered private funding (through taxes & other mechanisms).

Back to your latest mistake: I have never memtioned being rich, but yes I am using money & capital interchangbly. This is becuase they are aspects of the concept of monetary wealth. They are not entirely interchangble (not all capital is money, but it for accounting purposes it is ascribed a monetary value), but they are certainly not mutually exclusive terms.

recedite wrote: »

When I say I have no problem with someone lending their own money for profit, I mean money that they have already earned and accumulated. I don't mean pie in the sky wealth.

The only thing pie in the sky is the notion that such draconian limits should be set on the creation of capital (hence the real reaosn for Basel III - to make sure trhat it is sustainable). All monetary systems that do not include some form of leverage fail for various reasons, more often than not revlot of the masses, except this time it's the fact that the masses were given exactly ehat they wanted that is causing the problem.

recedite

antoobrien wrote: »

Now consider this, the bodies that lends the banks money, the CB & ECB can not operate without having first gathered private funding (through taxes & other mechanisms).

They can print more money without having gathered any additional private funding. Calling it QE sounds better than calling it printing.

Money is simply a credit note, like an IOU. I can write an IOU without having any wealth at all, and it can be used as money if I can convince people to trust me.
Noonan spent a long time trying to convince the ECB that a promissory note was real money. Sometimes it works, sometimes it doesn't.

antoobrien

recedite wrote: »

They can print more money without having gathered any additional private funding. Calling it QE sounds better than calling it printing.

The ECB can not print money, it's illegal for them to do so under the current treaties.

recedite

They can expand the money supply temporarily, such as by buying bonds and by accepting bank loans/mortgages as collateral. They don't permanently dilute the value of money because they are mandated to keep inflation below 2%.

Godge

recedite wrote: »

I don't know anyone who had a deposit account in Anglo. But any retail deposits could have been protected with a State guarantee, up to a certain amount, similar to that applied in Cyprus. Investors made a bad judgement call, why should the humble taxpayer cover their losses?

As for wealth, even a poor person can be subject to an outward transfer of wealth, such as through rent, mortgage interest, taxation etc.

If an ordinary citizen takes out a mortgage from a bank, the bank need not have accumulated that wealth in advance. The (private) bank issues the credit based on their reputation and by having a banking licence. The money supply gets expanded by the ECB, by the amount of the mortgage. As the middleman, the bank feels entitled to collect monthly interest payments on the newly created money.

The investors (shareholders, the most risky one) lost out by having their shares wiped out, that is why Quinn collapsed.

Another group of investors (bondholders), some of them lost out because they were junior bondholders.

The senior bondholders were equivalent to depositers and lost nothing.

As for your example, the bank needs a certain level of wealth in advance, so your example doesn't work

KyussBishop

antoobrien wrote: »

The only thing bizarre is the fact that you don't realise that in order to loan money to somebody, wealth has to be amassed first. The payment of interest is a reward for allowing somebdoy else to use your wealth to amass wealth of their own.

That statement is fundamentally wrong. Banks create money by extending loans.

Economic theory being used to guide world economies today, gets basic things like that wrong, and getting something as fundamental as that wrong, subtly undermines key parts of almost all macroeconomic teaching that you have in colleges and textbooks today.

You're basing your arguments on theory that is simply wrong.

recedite

Godge wrote: »

The investors (shareholders, the most risky one) lost out by having their shares wiped out, that is why Quinn collapsed.

The riskiest investors are those that sell short or buy contracts for difference, and as I understand it, Quinns main difficulty was that he invested heavily CFD's. If he had only lost shares, he would still be in business, because he could only have lost some of what he owned.
CFD's are a bet on the share price; the gambler loses what they have promised, which can be more than what they actually own. So Quinn betted that the price of Anglo shares would rise. Then when the share price dived, he was convinced by the banksters to borrow more from their bank in order to buy shares in the same bank, which would in theory push the share price back up artificially. It all smacks of corruption and insider trading.

Not only that, but it backs up my position that the financial system is manipulated for private profit by people who are happy to accept the profits, but when their ponzi schemes collapse they pass their debts on to the public.

Godge wrote: »

As for your example, the bank needs a certain level of wealth in advance, so your example doesn't work

There is a barrier to entry. Most business models have one. Maybe you think a bank works by simply taking in x amount of money as a deposit, and then lending that amount out to someone else?

How do you think Anglo were able to keep lending money to Quinn to buy the shares? They were already broke themselves.
Every time he signed a loan agreement, they were able to conjure up more money (ie credit) through the magic of their banking licence.