macroeconomics, debtSource: http://www.bbc.co.uk/news/business-15748696
If I owe my friend £10 and he owe’s me £5 then I would go “I’ll give you a £5er and we’ll call it quits”.
According to the link above the UK owes the US €578bn and the US owes the UK €834bn. Why doesn’t Barrack Obama call up Dave and say “hey, why don’t we just give you €256bn”?
Wouldn’t that make it much more manageable? Or is there something I’m missing here?
Yes, it could make it more manageable. It may be a very good idea.
But there are a few catches.
There are some ways in which debt of the same nominal capital sum might have different values:
… and all of these are reflected in the current secondary-market prices of the bonds.
Both parties might consider value in mutual debt - holding foreign bonds might be a hedge against currency fluctuations, or a result of past trade imbalances, or protection anticipating future trade imbalances.
And within a country, the owner of foreign debt may not be the same entity as the issuer of that country’s debt. For example, we might have French government debt owned by Greek corporations, and Greek government debt owned by French corporations, so although the nations may (appear to) hold each others’ debt, it is not the case that legal entities hold each others’ debt.
One reason is that it’s not just different countries that owe each other debt, but different entities within these countries.
To use the “you and friend” example, let’s say your left hand owes his left hand ten pounds, and his right hand owes your right hand five pounds. Then it would be a case of not only netting out the five pounds between the two friends, but also settling issues between the two pairs of hands. And let’s say your right hand would consent to this arrangement only if after paying 5 pounds to settle the debt with your friend, you also paid it five pounds to settle internal accounts.
(In real life, the “hands” are different companies, which is to say that the settlement process wouldn’t be so easy.)
If you’ve got a mortgage and a current account with the same bank, would you like the bank to make things “much more manageable” by saying “You’ve got £5,000 in your current account and you owe us £140,000 on the mortgage so we’ll just net them off, and you now owe us £135,000 on the mortgage, and by the way you’ve got no money in your current account”?
Assuming you wouldn’t like that, think about why you wouldn’t, and you should have the answer to your question.
Government debt is about more than owing money. While need for issuing bonds is usually the need to fund the government there is more in a government choosing to purchase a bond than the desire to invest their money.
Political pull - Owning a countries debt provides some leverage in negotiations and world affairs.
Hedging - If a countries economy tanks but it owns debt in a country doing well it can leverage that debt to help get it back on its feet.
Assistance - If a country is teetering an exchange in bonds could be arranged that offer short term advantage to one of the countries.
Budgeting - Some times the income from debt holding interest can be used for accounting purposes. Eliminating interest income from one source may defund the budget of a program.
Difference in actual value - This @EnergyNumbers laid out well.
I’m not an expert in finance. But what I know is that the government issue the debt in “Bonds”. A bond is like a contract. Let say you bought a USA bond for USD500. The USA will give you a 10% annual interest on it for 5 years. You get USD50/year, and after 5 years you get your USD500 back (the bond is mature).
You are a UK Citizen. It’s like the UK is owing the USA $500. But both the UK and the USA don’t have control over this debt. The USA sold the bond. It’s now yours. You can also sell it. Let say you sell it to an American bank. Now the UK is no longer owing the USA.
So to make a response: No they can’t. Because they don’t have enough control over bonds once they sold them.
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