As I've long been saying, for every financial asset there is a financial liability (they always net off to +/- nothing) and the reason that banks' balance sheet totals are so huge is because they all owe each other vast sums of money; if you took all banks as a whole and netted off inter-bank payables/receivables, their balance sheet total would shrink by two-thirds.
Steve Baker MP (1) at ConHome refers us to the results of an exercise carried out by the ESCP Europe Business School (who appear to be quite well known) applying the same principles to payables/receivables between eight different Member States of the EU:
* The countries can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58%
* Six countries – Ireland, Italy, Spain, Britain, France and Germany – can write off more than 50% of their outstanding debt
* Three countries - Ireland, Italy, and Germany – can reduce their obligations such that they owe more than €1bn to only 2 other countries
* Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP.
* France can virtually eliminate its debt – reducing it to just 0.06% of GDP
1) Steve Baker MP is a man to watch, having once suggested that UK government gilts held by the Bank of England can simply be cancelled (unless Steven Baker MP is a different person to Steve Baker MP?). He also mentions the unfortunately named Mark Reckless MP who is (or was) a big fan of debt-for-equity swaps (once he was on course to become an MP, he told me to stop emailing him on the topic).
Monday 23 May 2011
"The Great EU Debt Write Off"
Subscribe to:
Post Comments (Atom)
23 comments:
I'm no economist and don't mind admitting it, so is this all feasible?
AKH, yes of course. It's just "off setting" or "contra entries" with which any bookkeeper is familiar. Has little to to with 'economics' and everything to do with 'politics' (i.e. dick waving).
As to countries like Greece which are borderline bankrupt, there is a sensible rule in insolvency law that if the bankrupt person owes you £100 and you owe him £40, then is netted down to £60 first, and you get a pro rata share of £60, rather than having to pay your £40 in full and getting a pro rata share of £100.
I may well be missing something obvious, but this sounds too good to be true to me. The original NYT graphic talked about "governments and banks". I'm guessing that the governments owe the debts to the banks (of other countries), as I doubt many of these governments have large sovereign wealth funds holding billions of euros of other governments' debts (if they do, why are they desperate to borrow more rather than just sell their holdings of other goverments' bonds?). So does cancelling this debt result in a gain for the governments at the expense of the banks (and the depositors of those banks)?
Ed, I haven't read the whole report. I suspect they treated a country as being the totality of [its commercial banks, other investors, central bank and government], i.e. this relates to cross border debts.
But within countries the same rules apply - UK banks hold UK government bonds and reserve balances at BoE; and at the same time UK banks owe the UK government a shed load of bail out money. These could also be netted off.
I've always compared it to the position of a great many individuals. Mr X borrowed £100,000 from the bank to buy his house, so he owes £100,000, but he has £25,000 in his savings account with the bank and £5,000 in his current account. If asked how much he owes the bank he would probably say £100,000, not realising that in fact he only owes £70,000.
TFB, yes, excellent example. And maybe Mr X also has £50,000 saved away in his pension fund and a life insurance policy worth £20,000, so his net financial assets/liabilities are in fact +/- £nil
And all the time he's paying interest on the mortgage, commissions on the pension fund and premiums on the life insurance, while receiving diddly squat in interest on his cash savings.
I've never understood why people would want to have savings and a mortgage. Why not use the savings to pay down the mortgage and reduce your outgoings?
"I suspect they treated a country as being the totality of [its commercial banks, other investors, central bank and government]": in otherwards, because you suspect their report is largely shite.
Even better is that countries that issue their own currencies could perfectly well print “loads-a-money” and buy back their national debts. Any country wanting to do this would need to get several technical details right, else it would all end in tears. For details see:
http://GoArticles.com/article/4680247
This is not any sort of free lunch. It would not bring an instant and dramatic rise in living standards. But abolishing, or drastically reducing national debts would make sense for several reasons.
Someone must be receiving the interest on all this debt? For them, this would be an incentive *not* for it to be cleared.
D, the whole exercise seems perfectly sensible to me, having read the pdf summary of how they did it and checked their sources.
As I said, I did the same exercise with UK banks and the net position was only a third as large as the gross, once you net off inter-bank stuff.
M, yup, that's another way of doing it.
DNAse, exactly not. If I owe you £100 at 5% interest and you owe me £160 at 5% interest, we can still net it off to you owing me £60 at 5% interest.
If the interest rates are different, then we work on market values, not face values, it can all be done.
Hmm. So if I in the UK own £1000 worth of German government debt, and Helmut in Germany has £1000 (or the Euro equivalent) of UK gilts, they should just be cancelled? Because 'The UK' owes 'Germany' £1000 and vice versa?
Where does that leave Helmut and me? Minus our savings it seems.
S, on closer inspection, the report just looks at banks, central banks and governments. they do not look at individuals who own govt bonds (or have cash on deposit at NS&I).
So if you, as a UK resident individual own German Bunds, you are unaffected.
Even if the experiment were extended to individuals, what happens is that you get given £1000 UK gilts instead of your German Bunds - the whole point is that is a netting exercise - nobody's net asset or net liability position is affected in the slightest and if you are a net saver, then you still end up with the same value of net assets.
"DNAse, exactly not. If I owe you £100 at 5% interest and you owe me £160 at 5% interest, we can still net it off to you owing me £60 at 5% interest."
But if I borrow £10,000 from a bank and then later deposit £10,000 back with the same bank, at the same interest rate (unlikely, I know), you could net it off to zero, but thet wouldn't get me back the fee the bank charged me to lend me the money in the first place, which, I suspect, is the purpose of all this zero-sum financial activity.
B: "the purpose of all this zero-sum financial activity"
It is far from zero sum - it makes profits for banks and losses for everybody else, and because of the friction involved, make us all collectively poorer.
Compare and contrast a burglar who smashes your window, nicks your telly and sells it down the pub. The total profits less losses of the householder, TV shop, glazier, police officers, burglar and man in pub net off to an overall cost to society.
See also "People who live off land rents".
Ok, (apart from the fact that if I wanted to own UK govt debt I would have bought that in the first place), how about I have £1000 on deposit at Barclays, and Helmut has £1000 worth of euros on deposit at Deutsche Bank. Those deposits are liabilities to the banks, but they also own £1000 worth of the opposite State debt as assets, so they are balanced. If you cancel the State debt owed in each direction, where does that leave Helmut and me?
With deposits in a bank whose corresponding assets have just been wiped out it seems.
"- it makes profits for banks and losses for everybody else,"
Which is why we are in this situation to begin with, why the write-off will never happen, why it will get worse, not better and why we are consistentently lied to about the whole thing, I suppose.
S, there are two kinds of people, those who can't understand and those who don't want to.
All the report is about is NETTING OFF mutual liabilities between governments and banks. Having read the instructions, the report does not look at individuals who are thus NOT AFFECTED.
i.e. before hand,
Greece owes Italy 50, it owed the UK 100.
Italy owes Greece 10, it owed the UK 40
The UK owed Italy 30, it owed Greece 5
after netting off mutual liabilities:
Greece owes Italy 40, it owes the UK 95
Italy owes Greece nothing, it owes the UK 10
The UK owes Italy nothing, it owes Gteece nothing
-----------
But as TFB's example shows above, individuals could make themselves a lot better off if they did a bit of netting off themselves.
B, because people are stupid and believe what the salesmen tell them?
Simple arithmetic aside, that is very harsh and I believe incorrect.
There can be no possible reason why one should leave one's cupboard entirely bare of a few quid. Folk like a small "just in case" balance in the bank to cover urgent and unforeseen emergencies. Without such, they would have no choice but to resort to borrowing again and thus incur even more interest charges in order to get back on even keel.
ASSSM, sure, you are in a better position with £5,000 in cash and a £100,000 mortgage than with a £95,000 mortgage and not any rainy day money, but the line has to be drawn somewhere.
I'd submit that having more than £10,000 in spare cash/investments/pension fund is silly until you've paid off your mortage (or student loan, credit card, whatever).
Mark, yes I agree, a sensible balance is what is required - which was the point I was trying to make.
Although for student loan, the interest rate is currently lower than some of the top savings accounts (even at basic rate of income tax). If your savings are maybe 70% of the amount of your student loan you would be profiting off the government.
Anon, yup, historically that was the case (I took my student loan in full, even though I didn't need it, and put the money in an ISA, for example).
But under the new rules which the Tories brought in to make the Lib Dems look stupid, there's a sliding scale interest rate:
The nominal interest rate is set at nil if you earn less than £21,000; at the rate of RPI inflation if you earn £21,000, with a sliding scale so that if you earn over £41,000, the rate is (RPI inflation + 3%).
Post a Comment