Below is the encouraging result of a simulation for mutual debt cancellation in Europe. However, I admit it, I don't think mutual debt cancellation to achieve debt reduction could avoid a gigantic economic collapse in Europe or anywhere longterm.
I do believe though it may be possible to squeeze a few years out of a global economic system that has been long due to be replaced by something sustainable like The Participatory Economy Project or the even more ambitious Venus Project.
The following was taken from this website which also provides files (and more information) to perform this calculation yourself or in a school/student/classroom environment.
Mutual debt cancellation to achieve debt reduction — the simulation
The idea is very simple. If Portugal owes Ireland €0.34bn of short term debt, and Ireland owes Portugal €0.17bn, we can write off Ireland's obligations and leave Portugal with a reduced debt of €0.17bn.
If you are both a debtor and a creditor you do not need money to settle claims. Rather than require additional funds to deal with choking debt, why not write it off?
The diagrams below show the before and after situation, based on analysis done by students. The simulation itself took place on May 17th 2011 and involved three separate trading rounds.
Here is the situation before the mutual debt cancellation in the European Union:
The debt ranking is as follows: UK, Germany, Italy, France, Spain, Ireland, Portugal, Greece. Not that this is not the same order as the one that would result from using debt/GDP which would propel Greece to place one.
Here is the situation after two rounds of mutual debt cancellation in the European Union:
The debt ranking has now changed to: UK, Italy, Spain, Germany, Portugal, France, Ireland. Most importantly however, all countries could reduce their debt by about 50%.
This would not only reduce the debts but also the interest.
[update Nov 8, 2011] : Writing-off (not just canceling mutual debt) all debt may be another possibility and justifiable because much debt was created fraudulently — read this interesting article here