The Feasibility of Sovereign Debt Cancellation

Alessandro Pedrazzini - April 17, 2021

A bold plan to cancel the European Central Bank’s $3 trillion in public debt, presented as an alternative way to reduce Eurozone debt ratios after a pandemic spending spree, has been dividing economists. It is a law in finance that when government deficits balloon, so do demands for debt forgiveness. And, indeed, this time is no exception. Already in November, Riccardo Fraccaro, an Italian cabinet undersecretary and close aide to Prime Minister Giuseppe Conte, proposed that the European Central Bank cancel government bonds purchased during the pandemic. Putting our skepticism aside for a moment, there are sound reasons for such calls.

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