[10/08/2011] News

Anthony J. Evans (Escp Europe Business School) and the write off of the public debt in Europe

"The great Eu dept write off" study (http://www.eudebtwriteoff.com/) is "a simulation conducted by students at ESCP Europe Business School. The aim was to uncover the amount of interlinked debt between Portugal, Ireland, Italy, Greece, Spain, Britain, France, and Germany; and then see what would happen if they attempted to cross cancel obligations".

This simulation tries to highlight the consequences of an action that first glance may seem obvious, but instead it doesn't seem so trivial: "when one economic entity is both a creditor and debtor to another, a somewhat obvious and simple idea is to cross cancel their debt".

For an explanation on the subject, greenreport.it has interviewed Anthony J. Evans, the professor of Escp Europe Business School who led the study.

Which data were taken in the study as a reference to draw the size of the tangle of European debts? It only takes into account the public debts or also private debts?

We used data from the BIS Locational banking statistics, and one of the main findings of the study was the lack of detailed information regarding the breakdown of debt. We decided to focus on debt split country-by-country rather than type, so there is private debts involved. We aim to highlight this, so hopefully in future we can focus purely on government held debts. 

How reliable you judge the results, given the high financial difficulties in comparing different interest rates and different maturities of the various debts?

The main purpose of the study is a teaching device to get students to think about these issues. In reality there are a number of complicating factors - such as interest rates and maturities - but it would be wrong to only focus on "perfect" solutions. The scale of the problems in the EU mean that there's no easy way out. 

Do you think that the results of your study will form the basis for an initiative politically and technically possible to carry on in Europe? What do you think would be the market reaction to such a move?

It's hard to say. There has been some political interest in the study - not so much in implementing the idea, but certainly exploring it further. I think the markets want a solution, and the existing policies only prolong the problem. I suspect markets would like to feel that we have taken our dose of medicine and can begin a genuine recovery.  

What advantages and disadvantages would have on the international banking and credit system?

It depends - there are plenty of examples of times when default have encouraged investors, but there is also the potential for panic. In a leveraged financial system there are always going to be contagion risks, so with any policy to try to solve the debt crisis central banks will need to be vigilant.

What do you think are the underlying causes of the crisis? Do you think this crisis is just a hiccup that will absorb, or it suggests a necessary and major rewrite of our entire economic model (based on an undifferentiated and exponential economic growth) to an ecological economy?

It's quite simple - the public vote for politicians that promise high spending, but are unwilling to pay for it through taxation. We live in an era of permanent budget deficits, and a steadily increasing public debt. Governments try to monetize this through inflation, and hope that economic growth will make future tax returns higher, but there's an inevitable problem. Until we can restrict government spending we will suffer from debt crises. 

Whatever the reasons, the crisis' grip doesn't seem to want to loosen the U.S. and Europe. What do you think is the path to take to begin to glimpse the light at the end of the tunnel?

Confronting the problem. This will involve living within our means, and not placing unsustainable debt burdens on future generations. It sometimes takes a crisis for people to see this, but the downgrading of US government debt should send a strong signal that they need to reign in spending. I sincerely hope there is as little economic pain as possible, but I also hope that people learn from what's coming so that we don't repeat it.

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