Andy Xie: Europe’s is a money distribution problem

This quote from Andy Xie comes via FT blog Beyondbrics. He was arguing that the Chinese should stay well clear of becoming another player in the European sovereign debt crisis:

“Europe has enough resources to solve its problem.” Greece’s total debt is €350 bn, compared to over €8,000bn in the eurozone’s GDP. The eurozone is roughly balanced in international trade. “It is a money distribution problem within. In terms of fiscal deficits, by Asian standard, the cuttings required are relatively small. What Asian economies did after the Asian Financial Crisis were several times as big. It just doesn’t make sense for others to help Europeans when they could help themselves.”

That’s it exactly. A few days ago I asked myself what would happen if you just got rid of the debt.

The answer I came up with is that we would see a hugely productive economy. Think about all of the built up infrastructure, plant and equipment, and people in the developed and developing economies. it’s immense. Without the debt, with a clean slate, companies now cautious, would hire people like crazy and starting making stuff. The economy would sprint forward like a lion.

The point is that Europe has an enormous productive capacity, Greece included. Debt introduces a money distribution problem that becomes a flashpoint during periods of economic weakness because the inability of large debtors to pay imperils both the debtor, the creditor and everyone whose income is derived from those sources. If the debtors are large enough as in the sovereign debt crisis in the euro zone, you get a systemic crisis that often leads to depression.

The European sovereign debt crisis is all about apportioning losses between debtors, creditors, and taxpayers from debts that simply cannot be repaid in real terms. The various sides are overplaying the hands they were dealt. Apportioning those losses quicker prevents the kind of downward spiral we are now seeing.

I agree with the two Steves, Steve Roach and Steve Keen, we will have to see debt widescale forgiveness across the advanced economies before this is over. However, realistically, people are too attached to their negotiating positions at present for this to occur now. The economic situation will have to deteriorate much further before debt forgiveness becomes a viable solution.

Source: Andy Xie: China shouldn’t aid eurozone – Beyondbrics

  1. David Lazarus says

    This is a policy that I can get behind. It forces Germany to accept is part as part of the problem and part of the solution. China should not get involved as it will definitely have its own problems before long anyway with its own bubbles.

    I prefer the idea of quick write offs and forcing lenders to take losses rather than the current policy of trying to bail the banks out until they are able to cope without further bail outs. Greece under the existing plan will still have debts of 120% of GDP in ten years and so basically go nowhere for a decade. That is not a recipe for stability.

    1. Matt Stiles says

      Sounds to me then like simply implementing FAS 157, enforcing it and cleaning up the mess it would immediately create. I’d be happy with that.

      Last time I heard about it, FAS was planning to re-implement it by a certain date. But my internal cynic tells me that government thugs have probably strongarmed them into pushing that date back.

      Google News searches for “FAS 157” reveal comically little.

      1. David Lazarus says

        Yes mark to market should be the status quo, but I fear that the banks would still look very weak if that were the case. Residential Real estate is still well below its peak and with no prospect of it going up and still some likelihood of further falls, a return to accurate accounting is the last thing that banks need. They are busy reducing their reserves against losses as it boosts profits and bonuses. Add in bond losses and the big european banks are probably insolvent. Add in potential currency looses if Greece were to exit the euro as well.

        1. Matt Stiles says

          I think you missed my point. The idea with imposing m2m is to recognize most banks current insolvency and to liquidate their assets under either bankruptcy protection or nationalization.

          Any bank’s CFO that refuses to m2m or that insists on marking to model (or fantasy), can be put in prison for accounting fraud. That might encourage others to take their fiduciary responsibilities more seriously.

          1. David Lazarus says

            Yes I did miss that point. I do agree with you. I do think that the banks are insolvent. The problem is how do they nationalise? They need to nationalise after the losses have been taken. Nationalising and then making the creditors whole is what destroyed Ireland. Let the remains be nationalised. Let the banks creditors face moral hazard. That leaves a lot more government firepower to rebuild the banks.

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