On double counting debts
from Merijn Knibbe
Last Thursday, Eurostat issued a press release. It’s about public debt. Not all government debts are public debts. When a government borrows money from a pension fund, it’s counted as public debt. When one branch of the government borrows money from another part of the government, it’s counted as an increase in gross government debt – but for obvious reasons not as an increase in public debt. All the metrics on government which at the moment receive such a lot of attention are based upon public debt, not gross debt. And remember: the Eurostat metrics are the ‘official’ ones.
But what happens when some European governments borrow money to fund a ‘Special Purpose Vehicle’ (SPV) which lends this money to Ireland? Eurostat has decided that in such a case Irish public debt increases while, of course, gross debts of the other governments also increase – but public debts of these other governments also increases.
This is weird. If Ireland borrowed 10 billion directly, circumventing the SPV, total European government debt rises with 10 billion. If Ireland borrows from the SPV, European government debt rises with 20 billion. Now consider a worst worst-case scenario: Ireland as well as all the other countries default on their debts. In this case, this means that ‘the public’ will loose 10 billion, not 20 billion. But according to the present Euro-rules of the game, the Irish as well as the other governments have to either spend 10 billion less or to raise 10 billions to prevent even the remote possibility of such a scenario.
What to do?
It’s not the basic accounting that’s weird. But the rules of the ‘Euro-game’ have to change. Business accounting 101 teaches us that you need entire balance sheets and entire profit and loss accounts – or, in the case of a country, information on the tax base, the economy and the tax system and the like – to be able to say anything meaningful about the financial situation of a country. An example: as Italy has a level of household debt which is about 25% of the Dutch level (which in 2009 was 241% of disposable income of households), its financial risk profile might be quite a bit lower than the Dutch profile. No matter what the rating agencies state. We should not just look at government debts – or just at the debt side of the national balance sheet. If we do not change the way we analyze government debts, German households will end up paying more taxes not even to finance the Irish bank bail out but to, well, to – does somebody have an answer why?
A short term fix? Simple. For every additional 10 billion lent to bail out the banks again, 1 billion has to stay into the SPV as equity, provided by the same banks that are bailed out and financed by nationalizing bonuses (which, in Ireland as well as Spain as elsewhere, are still all over the place) or something like that. This will enable to change the SPV in a government owned bank – and public debt will suddenly be 10 billion lower.