Parallels and contrasts between Greece and Germany
How a serial defaulter became a model nation
by Chris Golden and Con Keating
Wed 1 Apr 2015
Imagine a country that finds itself so heavily indebted that it cannot adequately repay its creditors. The debts were incurred by a previous government, largely as a result of non-productive, profligate spending. The country’s best efforts in trying to repay its debts led to deep recession and great social unrest.
This debt was renegotiated on more than two occasions and very significant debt write-downs applied, with the remaining debt to be paid over a stretched-out period. A later government defaults entirely on the debt, but still manages to lead the country into deeper and deeper problems.
This sounds like a description of how Greece got into a debt mess – and a prescription for how to clean it up. In fact it describes the position up to the 1953 debt restructuring for Germany, one of the 20th century’s most notorious serial defaulters among sovereign nations, with one of the worst inflation records and a penchant for changing its currency. Germany’s record of international co-operation was cataclysmic. But with the help of debt relief agreed with a ‘troika’ of international lenders at the 1953 London debt conference, Germany put its house in order. It became an international success story and a model nation.
The clearest parallel between Greece today and Germany in 1953 is that neither has a good track record. Germany was seen as a hopeless case, as Greece is accused of being today. The second important parallel is that, without a complete and generous renegotiation of all of Germany’s debt in 1953, the country would have become quickly insolvent. The same holds true of Greece today. The only solution that will lead to a better future is to renegotiate all of Greece’s debt in a spirit of generosity, treating Greece as an equal partner and requiring solely payments that can be afforded reasonably easily.
There are two key differences between Germany 62 years ago and Greece today. First, Germany, even as a serial defaulter, had a track record as an industrial powerhouse, which gave creditors some confidence that they would eventually be repaid, albeit at a much lower rate than anticipated when they bought German bonds.
The second difference is geopolitical. Germany was an occupied country. Its viability as a buffer state shielding the rest of western Europe from Soviet domination needed to be bolstered. A viable (West) Germany was essential to the US and Nato strategy of containment. Notwithstanding the geopolitical sensitivities about Greece’s position in a volatile part of southeast Europe, the country is not in the same acutely vulnerable circumstances as was Germany eight years after the end of the second world war.
During that time of uncertainty at the beginning of the cold war, Germany amassed even more debt than in 1945, more than doubling the total. A syndicate of 31 creditors was formed to find a solution. Negotiations ensued in London with a troika representing all creditors. After two years, a satisfactory compromise was found, involving reducing the amount of the debt by about 50%. It was payable over 30 years with reduced interest rates and a grace period of five years in which no principal would be repaid.
Debt repayments were limited to 3% of export revenues in any year. Where Germany felt it could not meet those sums, it had recourse to arbitration. There were a number of contingent repayments. For example, German reunification in 1990 triggered the repayment of interest accumulated up to 1953 after Hitler’s default in 1934 on the Dawes loan of 1924 and the Young and Kreuger loans of 1929. The 1953 settlement gave the Federal Republic an exemption on repayment of East Germany’s debts. They became repayable on reunification in 1990, in the form of 20-year bonds which matured and were repaid in 2010. There were further contingent reschedulings, including debts of the state of Prussia, which will be renegotiated if and when the lands in question are reunified into Germany.
These negotiated contingency plans could be similar to various ideas for Greek rescheduling put forward by the Athens government, which has suggested repayments linked to GDP growth – assuming that the Greek economy eventually turns the corner. All these aspects depend on one crucial issue – trust – at present singularly lacking between Greece and its lenders. A minor source of solace for Greece may be that, at the London conference of 1953, this was a factor in gravely short supply – and yet, as it turned out, this did not halt an eventual accord.
Chris Golden is Chairman of three standing Commissions of the European Federation of Financial Analysts Societies. Con Keating is Head of Research, BrightonRock Group. This is an abridged version of an analysis of the 1953 debt conference that will appear in the OMFIF April Bulletin. It is the second of two articles on aspects of German history commemorating the 200th anniversary of Bismarck’s birth.
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