Britannia Radio

The great EU debt write off

Anthony J. Evans, Associate Professor of Economics,

ESCP Europe*
Terence Tse,

Associate Professor of Finance, ESCP Europe

May 20 2011

When one economic entity is both a creditor and debtor to another,

a somewhat obvious and simpleidea is to cross cancel their debt.

We created a simulation where students were required to research the debt position of 8 EU countries

(Portugal, Ireland, Italy, Greece, Spain, Britain, France and Germany)

and then conduct a negotiation exercise to reduce their total debt burdens.

The key findings were as follows:

The EU countries in the study 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 than50% 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
*
Contact: Anthony J. Evans, ESCP Europe, 527 Finchley Road, London, NW3 7BG, UK.

Email:anthonyjevans@gmail.com.

We thank all participating students for their time and efforts in generatingthese findings.

We also acknowledge the advice and support of Jeremy Baker, and helpful comments

from Philipp Bagus, Ewen Stewart and James Tyler; the usual disclaimer applies.