The Great EU Debt Write Off

by Anthony J. Evans & Terence Tse
ESCP Europe

May 20, 2011

When one economic entity is both a creditor and debtor to another, a somewhat obvious and simple idea 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 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

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