How Europe cancelled Germany’s debt in 1953

27 February 2017 by Jubilee Debt Campaign

The German delegation signs the London Debt Accords on 27 February 1953. Photo: German Federal Archives

The 1953 London Debt Accords show that European leaders know how to resolve a debt crisis in the interests of justice and recovery. Here are four key lessons for Greece’s debt crisis today.

On 27 February 1953, an agreement was signed in London which resulted in the cancellation of half of Germany’s (then West Germany’s) debt: 15 billion out of a total of 30 billion Deutschmarks. [1]

Those cancelling the debt included the United States, the UK and France, along with Greece, Spain and Pakistan – countries which are major debtors today. The agreement also included private individuals and companies. In the years following 1953 other countries signed up to cancel German debts, including Egypt, Argentina, Belgian Congo (today the Democratic Republic of Congo), Cambodia, Cameroon, New Guinea, and the Federation of Rhodesia and Nyasaland (today Malawi, Zambia and Zimbabwe). [2]

The German debt came from two periods: before and after World War II. Roughly half of it was from loans Germany had taken out in the 1920s and early 1930s, before the Nazis came to power, which were used to meet payments ordered by the Treaty of Versailles in 1919. They were a legacy of the huge reparations forced on the country after defeat in World War I. The other half of the debt originated from reconstruction following the end of World War II.

By 1952, Germany’s foreign-owed debt was around 25% of national income. This is relatively low compared to debtor countries today: Spain, Greece, Ireland and Portugal’s debts to foreign lenders are all over 80% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
. But West Germany had to undertake huge reconstruction following the war, and foreign currency with which to pay foreign-owed debts was scarce. The German delegation at the conference convincingly argued that its debt payments would rise sharply in the near future, and that this would significantly hinder reconstruction. Following the debt cancellation, West Germany experienced an ‘economic miracle’ with large-scale reconstruction, and high rates of growth in income and exports. This stability contributed to peace and prosperity in western Europe.

Creditors to West Germany were keen to stabilise the country’s politics and economics, so that it could be a ‘bulwark against communism’. This unique political reasoning led to creditors adopting a much more enlightened approach to dealing with a country’s debt, which has unfortunately not been repeated in debt crises of the last thirty years – in Latin America and Africa (1980s and 1990s), East Asia (mid-1990s), Russia and Argentina (turn of the millennium) and Europe today. Through these crises, Germany has been a creditor, as can be seen most starkly in the current European debt crisis.

As well as the scale of debt cancellation, there were several other features of the London Debt Accords which were of great benefit to Germany, and the principles of which could be applied to debtor countries today.

1) Setting limits on debt payments

Most ingeniously, it was agreed that West Germany’s debt payments could only come out of trade surplus. If the country had a trade deficit, no payments would need to be made. This meant that it only made debt payments using revenue it had actually earned, rather than having to resort to new borrowing or using up foreign currency reserves. It prevented a return to crisis or long stagnation. If it did have a trade deficit, West Germany was also allowed to restrict imports.

For creditor countries it meant that if they wanted to be repaid, they had to buy West German exports. The mechanism for doing this was that they allowed their currencies to ‘rise’ against the Deutschmark. This meant it was cheaper for their citizens to buy products produced in Germany. This increased German exports, earning the country the money to repay the remaining debt. This effectively meant that creditors had to restructure their economies as well – by importing (ie. consuming more) rather than forcing the debtor to implement austerity.

Deficits, surpluses and debt

If a country is exporting more than it is importing, it has a trade surplus. This means it has left over revenue which is not spent on any imports. It either has to be spent on paying debts, or has to be lent to other countries, creating debt for them.

If a country has a trade deficit, it is importing more than it is exporting. To be able to do this it either has to borrow money from other countries, or sell assets it owns to other countries.

Debts between countries are therefore caused by (or cause) trade deficits and surpluses. If one country wants to have a surplus, it relies on another country having a deficit. The more countries are in balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. with each other, the more stable the world economy will be.

In order for debts to be repaid, debtor countries need to have trade surpluses, and countries which are owed money need to have trade deficits. It is very difficult for debtor countries to move to having a trade surplus, if creditors are not willing to also move to having deficits.

It is not theoretically possible for all countries to have surpluses, short of the Earth trading Market activities
Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit.
with another planet.

West Germany did indeed have trade surpluses throughout the period of debt payment, and so the clause never needed to be invoked. But its presence helped rebuild the West German economy and export base by giving an incentive for creditors to buy West German exports, and allow the Deutschmark to devalue against their currencies.

However, German competitiveness and under-valuation of the Deutschmark continued following the period of debt repayment, and was ‘locked in’ with other Eurozone countries with the creation of the Euro in the 1990s. Whilst in the 1950s and 1960s West Germany’s trade surpluses enabled the debt to be paid, in more recent decades they have contributed to increased debt in other countries, most notably countries such as Greece, Ireland, Spain and Portugal today.

Given the debt cancellation, and reduction of interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, West Germany’s relative debt payments were 2.9% of exports in 1958, the first year for repayments, and then fell as exports grew. In contrast, today the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
and World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

regard debt payments of up to 15-25% of export revenues as being ‘sustainable’ for the most impoverished countries.

In 2015, Germany is expected by the IMF to yet again have a trade surplus, of 5.8 per cent of GDP, when it could be buying exports from debtor countries to help get them out of the crisis. Moreover, debt payments are far higher as a percentage of exports than the maximum spent by West Germany following debt cancellation. The Greek government’s foreign debt payments are around 30 per cent of exports. [3]

Heavily indebted countries in the global South are also making debt payments at much higher levels than West Germany did. Pakistan, the Philippines, El Salvador and Jamaica are all spending between 10 and 20% of export revenues on government foreign debt payments. [4] This does not include debt payments by the private sector.

2) Including all types of creditor

All types of creditor were brought into the restructuring, whether foreign governments or companies. This ensured equal treatment for all, whilst preventing Germany being pursued by companies for double the amount of debt it was paying to others.

This is in marked contrast to debt restructurings of recent years. The Heavily Indebted Poor Countries Heavily Indebted Poor Countries
In 1996 the IMF and the World Bank launched an initiative aimed at reducing the debt burden for some 41 heavily indebted poor countries (HIPC), whose total debts amount to about 10% of the Third World Debt. The list includes 33 countries in Sub-Saharan Africa.

The idea at the back of the initiative is as follows: a country on the HIPC list can start an SAP programme of twice three years. At the end of the first stage (first three years) IMF experts assess the ’sustainability’ of the country’s debt (from medium term projections of the country’s balance of payments and of the net present value (NPV) of debt to exports ratio.
If the country’s debt is considered “unsustainable”, it is eligible for a second stage of reforms at the end of which its debt is made ’sustainable’ (that it it is given the financial means necessary to pay back the amounts due). Three years after the beginning of the initiative, only four countries had been deemed eligible for a very slight debt relief (Uganda, Bolivia, Burkina Faso, and Mozambique). Confronted with such poor results and with the Jubilee 2000 campaign (which brought in a petition with over 17 million signatures to the G7 meeting in Cologne in June 1999), the G7 (group of 7 most industrialised countries) and international financial institutions launched an enhanced initiative: “sustainability” criteria have been revised (for instance the value of the debt must only amount to 150% of export revenues instead of 200-250% as was the case before), the second stage in the reforms is not fixed any more: an assiduous pupil can anticipate and be granted debt relief earlier, and thirdly some interim relief can be granted after the first three years of reform.

Simultaneously the IMF and the World Bank change their vocabulary : their loans, which so far had been called, “enhanced structural adjustment facilities” (ESAF), are now called “Growth and Poverty Reduction Facilities” (GPRF) while “Structural Adjustment Policies” are now called “Poverty Reduction Strategy Paper”. This paper is drafted by the country requesting assistance with the help of the IMF and the World Bank and the participation of representatives from the civil society.
This enhanced initiative has been largely publicised: the international media announced a 90%, even a 100% cancellation after the Euro-African summit in Cairo (April 2000). Yet on closer examination the HIPC initiative turns out to be yet another delusive manoeuvre which suggests but in no way implements a cancellation of the debt.

List of the 42 Heavily Indebted Poor Countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoro Islands, Congo, Ivory Coast, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Zambia.
initiative, which cancelled $130 billion for 35 of the most impoverished countries in the 2000s, only cancelled debts owed to international institutions and foreign governments. Private companies were not compelled to take part. This has led to some of the poorest countries in the world, such as Sierra Leone, Zambia and the Democratic Republic of Congo, being sued in western courts by vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
, for huge amounts on debts which they paid very little for.

In late 2001, Argentina defaulted on its debt when it became simply too large to pay. Many of the private creditors agreed to sign up to new agreements where they would be paid 30 cents in every dollar that was owed. However, some holdout creditors, many of them vulture funds who bought the debt cheaply in the midst of the crisis, are suing the now-solvent Argentina for the full value of their debt.

In June 2014, the US Supreme Court upheld a New York court judgement in favour of two US vulture funds, NML Capital and Aurelius Capital, who are seeking $1.3 billion from Argentinian debts dating back to the 2001 crisis. The judgement made it illegal for Argentina to pay any of its debts unless it agreed to pay the vulture funds in full. Argentina refused, forcing it into a new debt default and a stand-off which continues today.

In Greece, two debt restructurings were held in 2011, which resulted in over 90% of private creditors taking a more than 50% reduction in the debt owed to them. This ‘reduction’ was still more than the private holders of the debt would have got if they had sold the debt on the market. And creditors insisted that the new debt was issued under foreign, mainly British law, giving the Greek government much less control over its debt in the future.

Furthermore, creditors who held the old debt under non-Greek law, such as in the UK or Switzerland, were able to stay out of this deal, and are still being paid the full amount, more than double what other creditors are receiving. Again, many of these are vulture funds who bought the debt cheaply and so are making a huge profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. out of the Greek people. Moreover, bailouts over the previous couple of years mean much of the Greek debt has been transferred away from being owed to banks and to public institutions such as the IMF and EU governments instead. This debt was exempted from any reduction, and so Greece’s foreign-owed debt is now well over 100% of GDP.

3) Including all debts owed, not just government

The London Debt Accords addressed all debts owed by the West German economy to people, governments and companies in other countries. It therefore included debts of German individuals and companies, not just those of the government.

Much of the debt crisis today has been caused by debts owed, at least initially, by private companies, especially banks. For example, borrowing by Ireland’s private sector led to the foreign debt of the country as a whole reaching 1,000% of GDP by 2007. In contrast to the reckless lending and borrowing of the private sector, the government had a budget surplus during this time, and its total net debt – owed to both Irish savers and foreigners was down to just 11% of GDP by 2007.

For an economy to escape from the stagnation caused by debt, the debts owed by both governments and private companies need to be addressed.

4) Negotiations rather than sanctions

If West Germany did not, or was unable, to meet debt repayments, the agreement said there would be consultations between the debtor and creditors, whilst seeking the advice of an appropriate international organisation. This is in marked contrast to debt ‘negotiations’ over recent years where creditor governments and institutions, such as the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

, IMF and European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

, have dictated terms to debtor countries, and forced them to implement austerity and free market economic conditions. As it transpired, West Germany did not have further problems with the debt, so again the clause never had to be invoked.

Greece: Break the chains

Inspired by the ancient idea of jubilee, a time when debts were cancelled, slaves were freed and land was redistributed, Jubilee Debt Campaign is calling for a new debt jubilee in response to today’s global economic crisis. Such a jubilee would provide a framework for tackling today’s debt and banking crisis in Europe, as well as the continuing burden of unjust debt in the global South. It would mean:

Cancelling the unjust debts of the most indebted nations
Promoting just and progressive taxation rather than excessive borrowing
Stopping harmful lending which forces countries into debt

Greece is clearly one of the countries most in need of debt cancellation today. After more than four years of austerity, Greece’s debt has risen from 133% of GDP to 174% of GDP. The minimum wage has fallen by 25%, and youth unemployment is over 50%. Plus more than 20% of the 11 million people in Greece are now living below the poverty line. It is vital that Greece’s creditors learn the lessons of Germany’s debt deal of 1953 and break the chains of debt for Greece today.

What you can do
TAKE ACTION: Sign the Europe-wide petition to resolve debt crises
Read our Six key points about Greece’s debt briefing



[1The debt cancellation was with West Germany, which had inherited all of Germany’s debt owed to the western world after World War II. So the cancellation was of ‘Germany’s’ debt, although negotiations were only with West Germany.

[2This, and much of the information in this briefing on the German debt cancellation deal, comes from: Kaiser, J. (2003). Debts are not destiny! On the fiftieth anniversary of the London Debt Agreement. (Jubilee Germany). And two other documents ‘Double standards applied’ and ‘Q&A about the London Debt Accord for Germany 1953’.

[3IMF, World Economic Outlook database.

[4World Bank, World Development Indicators database.

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