When Greece forgave Germany's debt
When Greece forgave Germany's debt
Forgiving debt, if done right, can get an economy back on its feet. The International Monetary Fund certainly thinks so, according to a new report in which it argues Greece should get help. But Germany, another major creditor to Greece, is resisting, even though it should know better than most what debt relief can achieve. After the hell of World War II, the Federal Republic of Germany – commonly known as West Germany – got massive help with its debt from former foes. Among its creditors then? Greece.
The 1953 agreement, in which Greece and about 20 other countries effectively wrote off a large chunk of Germany's loans and restructured the rest, is a landmark case that shows how effective debt relief can be. It helped spark what became known as the German economic miracle.
The IMF backed the call to make Greece's debt manageable with a wide-ranging report on Thursday that also blames the Greek government for being slow with reforms. Despite years of budget cuts, Greece's debt burden is higher than when its bailout began in 2010 – more than €300 billion ($435 billion), or 180 per cent of annual GDP – because the economy has shrunk by a quarter.
The 1953 London Agreement, hammered out over months, was generous to West Germany. It cut the amount it owed, extended the repayment schedule and granted low interest rates. And crucially, it linked West Germany's debt repayment schedule to its ability to pay – tying repayments to the trade surplus it was running and expected to run. That created an incentive for trading partners to buy German goods.
"The London Agreement gave Germany sweeping debt forgiveness and protection from creditors, in exchange for pro-market reforms," Professor Albrecht Ritschl, of the London School of Economics said. West Germany was able to borrow on international markets again, and, free of onerous debt payments, saw its economy grow strongly. Development activists cite that case when arguing for easier terms for troubled countries today, including Greece.
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