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Dublin: 11 °C Friday 24 October, 2014

Student study: Ireland could write off 85 per cent of its European debt

The pan-European ESCP business school says Ireland could get rid of €184bn in debts – by simply cancelling them out with others.

Cancelling out two-way debts between European countries could help Ireland write off over €180bn in debts, according to a student study.
Cancelling out two-way debts between European countries could help Ireland write off over €180bn in debts, according to a student study.

AN ECONOMICS SIMULATION carried out by students from an elite pan-continental business school has concluded that the Irish government could write off a whopping €184 billion in debt – simply by cancelling out its debts with those of other countries.

A study carried out by postgraduate students at the ESCP Business School said eight European debt-laden European economies could simply write off over €2 trillion in debt, by cancelling out obligations where countries owed money to each other.

The same simple procedure – where the five weak ‘PIIGS’ economies, Britain, France and Germany all simply ‘cancel out’ any debts they hold to each other – would reduce Ireland’s outstanding debts by over 85 per cent, according to the findings.

The exercise, carried out across three stages on a date in May, worked as follows:

  1. Two countries who owe money to each other – and where those loans fall due at around the same time – simply cancel each other out;
  2. Three countries, who owe money to each other in a ‘triangular’ arrangement – and, again, where all of the loans fall due at the same time – write off their debts to each other;
  3. A session of ‘free trading’ where countries could negotiate other settlements – where, for example, a selection of 2-year and 4-year loans from one side could be traded off with 3-year loans from the other side.

In Ireland’s case, the students found that the debt – of some €215bn at the time of the exercise – could be reduced to a little over €31bn, with the majority of the debt being written off after stage 1 of the simulation.

While Greece would still struggle to make much a dent in its own mountain of debt – seemingly because most of its debts are held by European countries outside of the other seven – other countries would fare far better.

France would be able to become virtually debt-free under the simulation, simply because most of its debt is held by Germany and vice-versa – with France benefitting to the tune of €382 billion overall.

Germany would reduce its debt from €563bn to €103bn – a drop of 81 per cent – while Spain and Italy would approximately halve their debts.

While the students admit that their simulation “does not solve” the problem of the EU debt crisis, they said it at least showed that debt cancellation was a viable policy option:

The fact that so much debt is interlinked presents a real opportunity to solve the problem.

The web of interlinked debt is too thick to be dusted away by classroom games, however policymakers should attempt to replicate this study, and they may find that instead of spinning further webs they might get out a duster to clean things up.

It might all be academic – literally – but on the first anniversary of Brian Lenihan’s admission that we were looking for a €67.5bn bailout, it’s a sobering thought.

More on the study can be found at the nicely-named EUdebtwriteoff.com.

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