The EU Web of Debt

It’s November 2011, you cannot turn on a TV, listen to a radio or open a newspaper without the European Union Debt Crisis being thrust down your throat.  Depending on where you live, you are either being told your taxes will need raising to pay for it, or more austerity and cuts will be needed to avert it. Most likely both!

One minute it’s PIIGS, then Greece is tipping us over the edge single handed, before Italy starts to feel left out and piles into the melee. The joys of a unified currency.

Those of us sitting prettily in the UK wiping the sweat from our brow, not having joined the Euro, can stop looking smug. We are owed 120 billion Euros by Germany, 186 billion Euros by France, 93 billion Euros by Ireland and that’s just a few of our neighbours! We are up to our necks in Euro debt.

With such huge figures being thrown about, you begin to wonder how all this debt was created? Where did it come from? Who had all this money to lend to the European Union?

Ridiculously the answer is every country in the EU! As debt costs nothing to create, you can theoretically lend an infinite amount of money to other countries even though you never had it in the first place. It’s just numbers on a computer. We mentioned earlier that France owed Britain 186 billion Euros but Britain owes France 194 billion Euros.

I’m sure it’s not just me that had the Eureka moment just then, that if you owe someone £10 and they owe you £8 you can work out that you actually just owe £2 and they owe you nothing? Pretty basic maths by anyone’s standards!

You may be thinking that it’s just not that simple, surely it can’t be? Well you are right. Countries lending is also based on the term of the loans. If you have a 1 year loan for £100 at 10% interest and a 3 year loan for £100 at 10% interest, then the 3 year loan is worth more to you, as you are gaining more interest overall and therefore earning more money.

A minor adjustment is required to the original Eureka moment. To cancel debts you need to sort them into short, medium and long term loans and then we are able to cancel debts of similar values.

Getting into the swing of it, there is an even deeper level of debt cancellation! If Mr X owes Mr Y £100 and Mr Y owes Mr Z £80 and Mr Z owes Mr X £50 then you can partially cross cancel debt by agreement of 3 parties.

Before going any further, it is time to assess what we are working with. How much debt is out there? Trying to get the answers to this is astronomically difficult but a great visual representation from a report entitled “The Great EU Debt Write Off” (May 20th 2011, Anthony J Evans & Terence Tse) is shown below:


Though this only takes into account the major European countries, these are the ones with the largest debts; Britain’s debt alone is shown as nearly 1 trillion Euros. (As of November 2011 Britain now owes 1.4 trillion Euros to the rest of the EU)

Debt doesn’t really matter though if you are owed more than you lent out. (theoretically)

Another factor to take into consideration is that debt is normally measured against the GDP (Gross Domestic Product) of a country. A large country like Britain can afford a greater debt than Greece as the economy is proportionally bigger. The IMF states that to be considered for membership to the EU your debt to GDP ratio should not exceed 60%, where as currently Ireland is well over 100% and climbing.

So once you narrow it down and take away the layers of concealment you reveal the countries with the real underlying debt issues. Put simply, those who owe more than they are owed.

Shown below, using the same visual representation after our debt cancellation procedures have been taken into account.


Just using the basic principles of debt cancellation previously mentioned we can clearly see certain countries are MUCH better off than before.

France has actually managed to reduce its debt to less than 1 billion Euros! Even Britain has reduced its debt by more than 50%.

Further debt cancellation is also possible using 4 parties or more, though in this scenario it has not been taken into account.

Another small contributing factor to the debt reduction above was allowing countries to have the option to negotiate debts of different lengths at different values. As an example a short debt of 3 billion for a long debt of 1 billion, as they will earn the country a similar overall interest.


Overall Findings

  • Total debt can be reduced by over 59%
  • Average debt to GDP can be reduced from 35% to 12%
  • Ireland, Italy, Spain, Britain, France & Germany can reduce overall debt by more than 50%
  • Irelands debt to GDP ratio goes from 140% down to 20%
  • France can virtually eliminate debt to less than 0.1% of GDP


Other Interesting Facts

  • 50% of Portugal’s debt is owed to Spain
  • Ireland and Italy can write off all their debt to other PIIGS countries
  • Greece can reduce their debt by 20% with 60% owed to France and 30% to Germany
  • Britain has the highest debt before and after the debt cancellation but can reduce their debt to GDP by 30%
  • Germany can reduce their debt to less than 5% of GDP
  • Prior to adding bailouts, Greece’s debt to GDP is only 36% before and under 30% after


Below I have attached a table showing the debts to GDP of each of the countries assessed in this exercise, I would suggest that the further you are to the right the better off you are!

To be kept up to date on this topic and other related issues please sign up on our webpage for FREE at www.zengold.com.  We hope you now have a better understanding of Europe’s web of Debt and what the central banks can do about it if they wanted to (but don’t hold your breath).

Yours sincerely

Barnaby Milbourn


Zen Gold

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