Guest Post: Why Isn't Anyone Talking About Writing Off 3 Trillion Euros of Bad Debt?

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Why Isn't Anyone Talking About Writing Off 3 Trillion Euros of Bad Debt?  

The only solution to bad debt is to write it off--renounce it all. Why aren't those who took the risks for their own private gain being forced to absorb the losses?

We all know some 3 trillion euros of debt in Europe is uncollectible. So why isn't anyone talking about the one and only solution, which is writing off all that debt? Since nobody knows how much bad debt there actually is in the Eurozone--care to guess on the market value of all those underwater mortgages in Spain or the true size of Italy's debts?--that 3 trillion is just a guess, but it's probably a reasonable starting point.

Let's start with the most basic fact about all this uncollectible, impaired, bad debt: every euro of debt is somebody else's asset. Wipe out the debt and you wipe out the asset. That's why there's no willingness to accept the writedown of debt: somebody somewhere has to suck up 3 trillion euros of loss.

Can we please dispense with the fantasy "solutions"?

There is no way Europe is going to "grow its way out of this debt." How much of the eurozone's "growth" was the result of rampant malinvestment and risky borrowing? More than anyone dares admit. It won't take austerity to crash the euroland economy, all it will take is turning off the debt spigot.

"Restructuring" is a code word for writeoffs. Here, let me "restructure" the euro bond you bought at a 4% coupon yield. Now you're going to get 2%, and you're going to like it. Bang, your bond just lost half its market value, but everyone gets to keep it on the books at full value. Nice, until you have to sell it to raise cash. Oops, the euro has slipped in value so you lost more than 50%.

Printing euros to buy the bad debt is just a shuck-and-jive game of transferring the losses to unsuspecting holders of euros or taxpayers. Allow me to reprint a quote from yesterday's entry, The World Is Drowning in Debt, and Europe Laces On Concrete Boots: as Nobel prize winning economist Thomas Sargent noted: "There's a fundamental truth that everyone has to understand: what the government spends, the public will pay for sooner or later, whether in taxes or inflation or having their debt defaulted on." (Source: BusinessWeek 11/20/11).

In other words, if the European Central Bank prints 3 trillion euros to bail out the banks and bondholders, holders of euros will suck up 3 trillion in lost purchasing power, or split the loss with taxpayers who have to pony up cash to give the ECB a threadbare sheen of solvency.

There is no free lunch. And since there's no free lunch, then we have to ask: who should suck the losses when 3 trillion euros vanish in a massive renunciation/writeoff? Answer: those who took the risk. I know this is a shatteringly obvious conclusion, but it reveals the central flaw in the global financial system: risk has been disconnected from return.

Those who made the risky bets have diverted the risk to others: taxpayers or the general public who holds currency. The gains from the bets are private, and theirs to keep, but all the losses are distributed to the public via government bailouts or money-printing. The first shifts the losses to the taxpayer, and the second shifts the losses to everyone holding the currency being devalued.

Not only has the risk been palmed off onto unsuspecting chumps, the returns have been concentrated into the few hands that control the big bets. This is the ideal setup for the stupendous gains and zero risk that characterize crony-capitalism: make the big bets with leverage and borrowed money, and skim the vast profits. Then when the bets sour, demand a bailout from the Central State, the ECB, the Fed, etc., which promptly socializes the losses and distributes them over the entire populace of taxpayers or holders of currency.

It works beautifully until the debt-serfs rebel. The EU's politicos are begging to start the printing presses, as that is the only way they can retain their power in the face of the debt-serfs' revolt. But at least one populace of tax-serfs (Germany) is rebelling against sucking all the losses via a massive reduction of purchasing power.

The apologists for bailouts always whine about poor Jacques Q. Publique, whose pension fund will take a hit if those 3 trillion illusory euros go poof. Here's reality: everyone with capital or responsibility in the wager has to accept their fair share of the risk and the return. J.Q. Publique risked some capital, even if he didn't control the bets being made with his money, and so he has to suck up his share of the losses.

Those who made the bets should rightly lose everything--yes, be wiped out. If risk and return are actually causally linked, then this is the only result of a big bet that sours: those who placed the bets should be wiped out. That includes money managers, bank honchos, bond-fund gurus, and everyone else who foolishly bought all this debt without investigating the risks.

Investors in banks made their investment to reap a return; as a result, they are exposed to the other side of return which is risk. They should be wiped out as well.

Who should not suck a loss are those who did not stand to gain: the taxpayers and holders of the currency. To repeat: the most basic fact about all this uncollectible, impaired, bad debt is that every euro of debt is somebody else's asset. Wipe out the debt and you wipe out the asset.

There is no way to avoid the 3 trillion in losses. the only question is who should absorb those losses: those who stood to gain, or the innocent chumps whose only crime was being a taxpayer or owner of euros? If there is any justice (or classical Capitalism) at all in Euroland, then those who made the bets and invested capital in the bets to reap a return are the ones who should absorb the losses.

Life will go on if the banks are wiped out and closed, pension funds and insurance companies take losses, etc. In fact, as I noted in The Collapse of Our Corrupt, Predatory, Pathological Financial System Is Necessary and Positive (November 5, 2011), the collapse of the predatory institutions which made all those bets would be a quantum leap forward not just in terms of justice but in the economic recovery everyone pines for.

Ideally, the dominoes will cross the Atlantic and take down the parasitic "too big to fail" banks and Wall Street leeches in the U.S. After all, they too made bets on euro-debt and they should absorb the losses.

If those who made the bets for their own private gain aren't forced to absorb the risk, then we don't live in either capitalism or democracy; we live in a financial-fascist tyranny.

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Careless Whisper's picture

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BaBaBouy's picture

3 Trill Euros ???


More Like 30 Trillion ===> Write this off, Bitchez...


The World Fin System is being hyjacked.


Everything on the planet is pointing to "Buy Gold" ...

Strider52's picture

"Buy Gold"?? But, remember, Gold isn't backed by anything! Fiat, on the other hand, is backed by the full faith and credit of our trustworthy PolyTicians and Bangsters..........oh, wait....

Sudden Debt's picture

I'm really thanking god I put all my money in PM's 30 months ago.

Today I got a letter from one of my banks, saying taht starting jan. 2012 that they''ll limit all whitdrawals to 650 euro per day.

It made me think about Reggie's bank run predictions.

As of now, I'm going to empty my accounts and keeping it all cash.

LawsofPhysics's picture

Nice, capital controls, rationing comes next.  Winning!

flacon's picture

Just wait until the food rationing starts...

LauraB's picture

Fiat is backed by our labor, that's why we're all slaves.

Hugh_Jorgan's picture

You got it. The writedowns are symbolic of the intractable, untenable set of circumstances that the Western world has inflicted upon itself to foment chaos. The Globalist bigwigs think that they can "use" this crisis to implement central planning on the Globe out in the open.

Sudden Debt's picture

Whatever, let me write you a check for that amount.
Just don't cash it before.....

FinHits's picture

Good solution. Let's write off US and Japanese and the UK debts as well. They are equally unpayable and in the same or higher ratio to the underlying GDPs.

hivekiller's picture

Juibilee! Jubilee! Jubilee!

Buck Johnson's picture

If you right off the 3 trillion (I say alot more), then we have the CDS's that come into effect which are in the tens of trillions of dollars.  And in so wanting to pay these CDS's and such, the financial institutions and banks will try to sell everything to get money including US treasuries.  Which the US will have to print money, which will start hyperinflation (really hyperstagflation).  Which will cause hyperinflation in the rest of the world since the world uses the US currency as the world currency.  You can't possibly print up trillions of dollars to cover our insurance company and banks bad bets to europe without that much money being felt instantly in the financial system.  I think what may happen is that the Western banking system is dead on arrival at the end of the kicking the can down the road.  And no matter what they do or say it's so intertwined with private and govt. that it will take down the system hook line and sinker.

Global Hunter's picture

Thumbs Up for CW I appreciate your effort...most of us come here to get an overview of what is going on the world so not sure why the thumbs down.

BaBaBouy's picture


Why Negatives? The PAID PLANTS are everywhere.

Its a nasty new world where money buys anything and everything, just ask "Bunga Bunga Man".

NotApplicable's picture

Some junk spam/threadjack posts as abusing polite forum etiquette, regardless of the content of the post.

FWIW, I don't bother either way.

YesWeKahn's picture

That's against Summer's central dogma.

DormRoom's picture

yeah, but he was an advocate of Central Bank intervention, not because it would help the wider population, but so his banker pals would not lose billions.


When the ECB buys the bad debt, they effectively shoulder it on the taxpayers, via inflation.  So the plutocracy doesn't lose any wealth.  But everyone else does.  Especially the old, and poor.


The problematic of modern finance is that its created a system in which a man can lose his humanity, and continue biologically living.


AngryGerman's picture

"Why Isn't Anyone Talking About Writing Off 3 Trillion Euros of Bad Debt?"

because if we all just really really strongly believe, and clap our hands, then all will be good...

hedgeless_horseman's picture



Why Isn't Anyone Talking About Writing Off 3 Trillion Euros of Bad Debt?

Because we in the USA are wearing the same irons...

Liability per American taxpayer* is now more than $1,000,000!

One man's debt is another man's asset.

With over 100 million US income tax payers, and most of the world paying the USD inflation tax, just imagine the income stream that comes from this plantation. why would a master free a (debt) slave that is performing so well?  There was a time in America when talk about freeing the slaves could get you lynched, or worse. 

*See lower right corner.

j0nx's picture

Looks like Captain Picard sold Geordi LaForge to the Orion slave syndicate.

hivekiller's picture

You all know, don't you, that the entire Roots saga was a fraud. Haley had to pay Harold Courlander - a white man - $650,000 in a plagiarism suit for stealing from Courlander's novel. Sort of like Martin Luther King plagarizing his thesis, speeches and being given a pass and sort of like all those made up holocau$$t stories, etc.


Like Henry Ford said, history is bunk.

greyghost's picture

why isn't anyone talking about writing off trillions of debt in the U.S.???????? why, how on god's green earth would the bankers ever get paid??????????????

Eally Ucked's picture

Not only US, the whole world has to write off probably 20T off debt to start growing. But Americans first have to forget about bigger is better, all that debt comes from that doctrine and it killed jobs and economies of Western world otherwise everything would gradualy adjust itself. But at least Americans had 3 decades of dream life. Don't forget that and think about others.

TooBearish's picture

I Know!- I know! cause its easier to ignore it!

gojam's picture

Global Jubilee Bitchez!

Cdad's picture

Why Isn't Anyone Talking About Writing Off 3 Trillion Euros of Bad Debt?

Not sure, but I think it is because Larry Fink has a better plan...namely, to "make people buy" crap he has in inventory, thus avoidinig the nuisance of having to post losses that would otherwise result from sheer arrogance and stupidity.

And so the solution, as proposed is Crony Capitalism, theft, corruption, Marxism, fascism...or write downs.  You can see the dilemma, I suspect. 

Dingleberry's picture

"Life may go on" if we wipe out the debts......but not Goldman Sachs life, or JPM's life, etc. etc.  There is the reason that there is no talk of wiping out debt.  The big boys would get hurt. Nuff said......

Roland99's picture

Privatize the profits, socialize the losses.


It's what's for breakfast!


IBelieveInMagic's picture

But wasn't lot of the soverign debt also run up because of untenable entitlement programs (even government jobs and military is kind of disguised entitlement programs -- reality is that there are not enough "real" jobs to support population with technology advancement/outsourcing). Guess the intention is to replace the non-performing debt with new but devalued money so that savers are still left financially ahead relative to the broke (nonetheless, everyone will experience loss in real asset values). Otherwise if they allow writeoffs, the savers in paper assets will be wiped out and it will be very difficult to standup a replacement paper based system. Also, the current financial system is beneficial to OECD nations but that advantage will be lost if they allow the current system to fail.

We may not like it, but monetization is what is for dinner!

Roland99's picture

oh, I'm sure that's a big part of it.  Also, what is Europe's demographics like?

In the U.S., we have a large senior population and fewer people working so the Soc Sec/Medicare tax revenue isn't as large as it was in the past.

We're all kind of victims of our own making.


Jean's picture

the collapse of the predatory institutions which made all those bets would be a quantum leap forward not just in terms of justice but in the economic recovery everyone pines for.

We can't do that, people are starving to death in Iceland right now /sarc


Quintus's picture

I have a lot of sympathy with the view expressed here that 'Those who took the risk should take the loss', but what about the little guy who deposits his money at the bank in the hope of merely earning enough interest to keep pace with inflation?  His bank goes down because it put his money in Govt bonds and he loses everything.  He didn't want any risk, and probably didn't think he was taking any.

Given the choice of being able to save cash in a form that retained 100% of its purchasing power (but produced no other return) without having to speculate on financial markets, I am sure that many/most people would jump at the chance.

By constantly eroding the purchasing power of currency, governments FORCE everyone, even little old grandma, to effectively put their money at risk by lending it to a bank (Which is what a deposit actually is) just to try and avoid penury though loss of purchasing power.

This is effectively government mandated risk taking, and I'm not so sure it deserves to be punished.

MJ's picture

Did you just use circular logic?  The government/banks create inflation, and therefore we need bailouts to support everyone that's trying to avoid inflation by buying risky assets?

Quintus's picture

No.  What we need is sound money that does not constantly depreciate.  The sort of money we used to have before the introduction of fiat currencies and fractional reserve banking.

Prior to this it was possible to live your whole life and the price of a loaf of bread on the day you died would not have moved significantly from the day you were born, other than as a result of seasonal supply/demand factors.

Inflation is an artefact of the monetary system.  It means you cannot realistically accumulate savings by keeping them 'Under the mattress' and out of the grasp of the bankers and their speculation schemes.

Ropingdown's picture

FDIC insurance was created specifically to protect that little guy, while also insuring that bank deposits did not run away in a panic.  However, I note that the FDIC was forced to protect big guys too in the 2008-2009 collapse, as the maximum account size  protected was raised enormously and many minor rich people spread their few million across eight or ten banks.  The little guy did not risk losing.  The banks and those with larger liquid assets and cash got what they wanted, though.  Who paid?  The little guy, later on, when low rates and higher FDIC charges hit his little accounts.  Does the little guy respond politically to that reality?  How can he?  The candidates of both parties claim the maneuver was necessary.  Translation: "Look, little depositor, you're lucky we protect you at all, and protecting those big deposits helped you by saving your bank!"  So the little guy pays twice, and essentially has no recourse.

Bill Bogus's picture

I enjoyed your comment very much as it has provided some well-phrased insight to me.

I think it is a bit contrived to conclude from your post that you advocate bailouts.
What reasonable alternatives to the "government mandated risk taking that doesn't deserve to be punished" can you think of?

While we're at it: something that I haven't been able to shake off since 2007/08 is the idea that many banks should've been allowed (forced) to go bust in 2008.
Can someone explain what's wrong about that concept? Is it that we couldn't have continued international finance without a catastrophic economic contraction (= decimating prosperity all over the world?)?

Am I correct that what "we're" doing now is lending "money" from the future with the intent of defaulting on the debt; and so fabricating a financial system that works "well" now at the cost of working not at all or to our demise in a dead bleak future?

Sorry for all the cynicism that's missing from this post. I'll make it up on occasion.

TheSilverJournal's picture

The debt can't be written off because the entire banking system would crumble. The can can be kicked farther down the road by printing..which is exactly what will happen..hyperinflation being the end result.

Don't be fooled, the USD is in much worse shape. The USD has much less road to kick the can down before heading over the hyperinflation cliff.

BigJim's picture

Only if (or when, obviously) the USD loses petrocurrency status. Then the fun begins! And if the euro collapses, that day is put off considerably... except the contagion will probably bring down the TBTF in the US too, and Ben will have to print, thus jeopardizing the USD petrocurrency status... so I guess we'd better hurry up and 'tame' Iran before any other OPEC leaders start edging towards the exits. Give them a nice reminder who keeps them in their palaces.

PulauHantu29's picture

DDS: Deflationary Death Spiral.

Financial stocks, houses, cars, and so on are being sucked up into a massive debt destruction.....some areas will benefit...oil PMs, fertilizer corp...etc

narnia's picture

the credit supporting the worldwide government spending induced fiat currency bubble is guaranteed, one way or another, by the sovereign nations.  if it starts to explode all over the place, they either have to entirely disavow it- which will spark a wide scale debtor revolution against the legal system- or they will have to print into hyperinflation anyway.

left to the market, all of this worthless credit would liquidate.  left to a bunch of interventionist, all of this worthless credit will eventually liquidate in even more dramatic fashion.  they are arrogant enough to think they can "manage" their way out of this.  silly central wankers.

SheepDog-One's picture

Whole lotta cold feet everywhere suddenly...OH it was all fun and games for years swapping imaginary trading vehicles and such, now that its time for bunch of useless billionaires need to take major haircuts and pay the bar tab it seems everyone has misplaced their wallets?

1 world bank, 1 world govt, 1 world currency...  my ass, they see it wont work and now no one has any idea what to do next.

Just my humble assesment of the whole stinking mess.

twotraps's picture

exactly!  go back and search articles in the run-up to the Euro.  The main selling point was all this potential economic power to take on the US Dollar and prove that the Europeans are more civilized bla bla bla and can work together bla bla bla.   How's that going now.  When politics drive the program its doomed.

TheAkashicRecord's picture



On a lighter note, check this out

Besti Flokkurinn, the Best Party, was founded in 2009 by Jón Gnarr, an Icelandic actor, comedian and writer. The party has from the beginning admitted that it will not honour any of the promises given before elections.[5] It claims all other parties are secretly corrupt, so it promises to be openly corrupt. Among its original goals was to satirize common themes in Icelandic politics, partly by mimicking the standard phrases, idioms and jargon used by Icelandic politicians.

However, it is not a joke party and has shown an interest in governing. It takes a left-wing stance on many issues. Jón Gnarr identifies himself as an anarchist; the party as a whole, however, is closer to the centre-left.[6]

Since its founding, Besti Flokkurinn has developed into a full-grown political party with its own independent agenda, which has yet to be identified to an English-speaking audience. The theme song of Besti Flokkurinn is "Simply The Best" by Tina Turner. Prior to the 2010 election, the party published a new version of the song with new, Iceland-specific lyrics. A music video was also made, featuring Ágústa Eva Erlendsdóttir.




Here's the clip from the documentary

Madcow's picture

Think about the Baby Boomers who are presently in charge.  What do you think they will do?

A.  Nuke the assets, and flush out all the fraud and corruption and allow a new generation of savers to re-build the economy along more fundamentally local lines.

B.  More taxes, more government, more fraud, more corruption, more intellectual dishonesty, and a growth industry in delusionary thinking to somehow explain away rapidly increasing costs of food and energy.

WonderDawg's picture

So, blame an entire generation for the crimes of some highly placed sociopaths?

pods's picture

I think your point would have come across much better without the shot at the boomers.  In reality, our problems are that of simple math (exponentials in a finite world).  Only the timing is subject to argument.

Many here shrug off anything that is set up in a Hegelian dialetic.  


Madcow's picture

this is not meant to be a shot at the boomers - merely an observation.

there's a massive divergence in the interests of younger and older generations coming into play. the older folks need the system to hold together - to the long term detriment of the young.  the young need the present system to collpase if they're going to have any shot at a prosperous future.

looking forward, the battle lines are going to be more young vs old than left vs right.