Cancelling Eurozone Debt: A Radical Solution Perhaps Not So Unlikely?

on Oct 15, 2012

Three days remain until the European Union summit where government leaders will gather for a two-day discussion of a banking union, a single EU budget, the Greek financial programme and the possible Spanish bailout.

Over the weekend Swedish Finance Minister Anders Borg caused a commotion when he said Greece will likely leave the Eurozone within the next six months. “It’s most probable that they will leave…We shouldn’t rule out this happening in the next half-year.” Mr Borg said at the annual IMF meeting in Tokyo. He also argued that Greece leaving the Eurozone wouldn’t alarm the markets because “in practice everyone already understands which way the wind is blowing”.

Wolfgang Schaeuble, the Finance Minister of Germany, strongly disagreed with both of Mr Borg’s statements – he said it is unlikely for Greece to exit the euro and warned that if it did it would create “huge, incredible difficulties for everyone”.
“Greece has to take a lot of very serious reforms” and “everyone is trusting that the Greek government is doing what is necessary”, said the German pro-austerity finance minister at a meeting with business leaders in Singapore on Sunday.

**Lithuania Turns Its Back to Austerity**
!m[European Union Summit in 3 Days. Agenda Topics Could Range from Grexit and Lithuania Rejecting Austerity Measures to Debt Cancellation](/uploads/story/576/thumbs/pic1_inline.png)The conservative government of Lithuania, which won widespread praise abroad for carrying out heavy budget cuts, has lost the elections to the centre-left coalition.

The country crashed hard when the financial crisis hit four years ago and had to go through draconian austerity and a brutal recession to get back on its feet. Its recent economic recovery came too late for voters, who had seen soaring unemployment and eroded spending power.
The new government, most likely a coalition between the Labour and the Social Democrats, has promised to raise the minimum wage, shift the tax burden towards the rich and postpone the euro entry until 2015, one year later than scheduled. One coalition leader said for Reuters that the budget deficit might, at a later date, be allowed to go above the level that Eurozone policymakers have determined as prudent.

**Cancelling the Government Debt – a Radical Option for Tackling the Debt Crisis**
Last week the IMF released a report lowering forecasted global growth and raising concerns that austerity measures are curbing output of countries.
Western government are struggling to find a balance between controlling public debt and at the same time boosting the rate of economic growth. Gavyn Davies from the Financial Times wrote of a radical option, which is now openly discussed – cancelling part of the government debt that has been bought by the central bank as a consequence of quantitative easing. Such a policy is possible because both the government and the central bank are within the public sector, which means this debt can be entirely netted out from the consolidated public sector balance sheet. Developed economies have never considered such an action outside of wartime because the potential inflationary consequences are seen as too dangerous to risk unleashing.
Two journalists (Simon Jenking of The Guardian and Robert Peston of the BBC) stipulated that Adair Turner, the Chairman of the UK Financial Services Agency, might be considering as viable the option of cancelling some of the Bank of England’s gilts holdings to boost the economy. Lord Turnet said in a speech last week that more unorthodox approaches, including “further integration of different aspects of policy” might need to be considered in the UK.
On Saturday Lord Turner distanced himself from the proposition of cancelling the government’s debt but according to the FT the notion remains widely discussed.