All together now – Cross Cancel European Sovereign Debt!

Tyler Drurden  in Zero Hedge has picked up the idea of cross canceling or ‘netting’  interlinked Euro debt that is going the rounds in various manifestations in his post.  His source is ESCP Europe.  The quote below is from their study.

This exercise does not solve the problem of the EU debt crisis, and raises more questions that it answers in terms of data reliability. However the revelation about how interlinked debt might net out (possibly even to zero) is a policy option. And indeed if this exercise leaves some countries with a large remainder it points to where the real problems are. Either way, it sheds light on the issue and uncovers information.

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.

The diagrams are particularly enlightening.  It shows that there is a solution to the Euro debt crisis but only if a space is created where all member states can jump together – or to be more precise – open their books all at the same time.


Europe’s Web of Debt (as it stood in May 2011)

After three rounds of ‘bargaining’ including bilateral netting, trilateral netting, and then free-trading (in order to manage different maturities), the complexity reduces dramatically – leaving it very evident where the debt really lies.



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