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When Greece Forgave Germany's Debt LONDON (AP) — 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 knows 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. So it's perhaps ironic that Germany is now among the countries resisting Greece's requests for debt relief. Greek Finance Minister Yanis Varoufakis claims debt relief is the key issue that held up a deal with creditors last week and says he'd rather cut off his arm than sign anything that doesn't tackle the country's borrowings. 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 — over 300 billion euros ($332 billion), or 180 percent of annual GDP — because the economy has shrunk by a quarter. Here's a look at when Germany got debt relief, and if such action might help Greece. ___ FORGIVE US OUR DEBTS 1953's London Agreement, hammered out over months, was generous to West Germany. It cut the amount 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 deal effectively blocked claims for reparations for the destruction the Nazis inflicted on others. But it wasn't a one-way street. "The London Agreement gave Germany sweeping debt forgiveness and protection from creditors, in exchange for pro-market reforms," said Professor Albrecht Ritschl of the London School of Economics. 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. "The same opportunity should be given to Greece that was given to Germany in 1953," said Eric LeCompte, executive director of debt relief organization Jubilee USA. Greece has had some relief. Private sector bondholders lost 53 percent of face value in a 2012 restructuring, and remaining debts have been stretched out. Now most of Greece's debt is owed to bailout creditors. While they, notably the IMF, have indicated that the debt load should be made more manageable, little has been done of late. ................................................................................................................................. Still, there are echoes from the German case that are relevant to Greece today. The deal to help Germany was based on a realistic way for the country to pay its debts — Greece's Varoufakis has suggested debt repayments be linked to growth. Over the bailout years, Greece has had to meet debt commitments even though its economy was in a depression. Germany's deal also acknowledged that mistakes after World War I in imposing punitive conditions helped boost extremists. In its misery, Greece has seen votes go to radical parties of left and right, including Nazi-inspired Golden Dawn. "It's deeply ironic that it's forcing Greece into a position that's prompting the rise of extremist parties," said Guinnane. |
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It's a real mess!! If Greece ends up leaving the Euro group, there will be a domino effect first of all causing banking havoc in their own country, then all the way down the line. It rather looks like a no win situation either way..... sighhhhhh.
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7/4/2015 7:15 am |
Hi Adolpho: Interesting info. I don't understand why people in so many countries around the world are so poor and why some countries require huge amounts of foreign aid just to keep going. Then there are other countries who keep borrowing and are in such huge debt. I just heard today that Canada may be going into a recession. The whole world is in such a mess.
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