Imagine a country that finds itself so heavily indebted that it cannot adequately repay its creditors. The debts were incurred by a previous government, and arguably in largely as a result of non-productive, profligate spending. The country’s best efforts in trying to repay its debts first lead to a deep recession and great social unrest. This debt is renegotiated on more than two occasions and very significant haircuts applied, with the remaining debt to be paid over a longer period than before. A later government defaults entirely on the debt, but still manages to lead the country into deeper and deeper problems, eventually followed by dire catastrophe.
A mere eight years after the fall of the catastrophic government, the country has amassed even more debt, more than doubling the total abrogated. A syndicate of some thirty-one creditors is formed to find a solution in good faith. A conference of all these creditors is called to decide how much is owed and how to handle the problem. Negotiations with a troika of lenders representing all creditors ensue and finally a satisfactory compromise is found. Altogether the process takes almost two years.
That compromise involves reducing the amount of the debt by about 50%, making it payable over up to 30 years with reduced interest rates and a grace period of five years over which no principal will be repaid. Last but not least the indebted country, which has been treated as an equal partner throughout the negotiations, need not pay if it cannot pay: it will only pay up to 3% of its export revenues in any year. If the country feels that it cannot repay even that, it can have recourse to arbitration.
If this sounds like a description of how Greece got into a mess of debt, and a prescription of how that mess could be cleaned up, so be it. In fact it is a description of how one of the worst serial defaulters of sovereign nations in the 20th century was treated, a nation that had one of the worst inflation records of that century, that changed its currency on a number of occasions, and a nation whose record of international cooperation was quite simply cataclysmic. With the help of the agreement with the troika, it went on to put its house in order, becoming one of the most successful countries on earth. This is the story of Germany, its debt, and how the troika that it negotiated with wiped the slate; or at least a large part of the slate.
It is easy with hindsight to think that the negotiators in 1953 would safely assume that all would go well and that the problem had been solved. But this is far from obvious: in the words of a contemporaneous commentary, from H.J. Dernburg of the Federal Reserve Bank of New York, “It would require almost prophetic vision to answer the question whether or not the debt settlement plan will be successfully consummated over its lifetime of some forty years. ….. only time will tell whether the present debt settlement is of more than passing interest….. Essentially, its fate will depend on the ability and willingness of the present and future German governments to give the plan continued support”
By the time negotiations started in London in 1953 we had reached the stage where, in the measured and laconic terms used in the preamble to the eventual agreement, “for about twenty years, payments on German external debts have not, in general, conformed to the contractual terms; that from 1939 to 1945 the existence of a state of war prevented any payments from being made with respect to many of such debts; that since 1945 such payments have been generally suspended; and that the Federal Republic of Germany desires to put an end to this situation.” Those 67 words summarised a far more complicated situation. On more than two previous occasions between the wars conferences had been called to discuss or eventually restructure the German debt; initially Reparation debt.
The first restructuring took place under the Dawes plan in 1924, and essentially lengthened the repayment period significantly as well as providing an international 7% loan of $230 million (≈$3.1 billion 2015) to Germany. $110 million of that loan was syndicated in the US by Morgan Guaranty and was quickly oversubscribed,. Germany could not keep up the payments and a second restructuring was secured under the Young plan of 1929-1930. That plan reduced the amount outstanding by a haircut of 20% to US$ 100 billion (2015 dollars) and extended the repayment period to 59 years until 1988. A loan of $351 million (≈$4.9 billion 2015), bearing interest at 5½ percent, was issued to the public at 90. $98,250,000 of bonds was issued in the US under the plan, also syndicated by Morgan Guaranty. The Bank for International Settlements was created in Basel to handle the payments.
It is important to note that by 1929, Germany was eager and willing to come to some arrangement. In sharp contrast to the post-hyperinflation Dawes negotiations, “Germany was no longer in a state of collapse… She was eager for a new arrangement…. she wanted to face her obligations of every description as once more a wholly free and independent member of the family of nations.”
The Young Committee’s restructuration plan had hardly been put in place when it once again became apparent that Germany could not or would not pay its debts: the global crash began in May 1931with the failure of the Creditanstalt, the largest Austrian bank. The global depression had set in and world trade had collapsed by the time US President Herbert Hoover secured the accord of 15 nations for a one-year moratorium in July 1931. One year later, Belgium, France, Germany, Italy, Japan and the United Kingdom attempted one more time to restructure (or indeed forgive) Germany’s Reparation Debts. Subject to concessions from the US, the countries agreed not to seek immediate payments from Germany and to reduce the remaining debt by a haircut of close to 90% to $713 million, but specifically preserved the rights of private bondholders under the Dawes and Young Loans. Overall German nominal reparation debts had been reduced by over 97%, though it is estimated that by 1933 Germany had repaid some 12% of its reparation debts (including interest).
This left Germany with the Dawes and Young loans as the only remnants of its reparation debts left to repay, over a number of years.
However this only covers a part of the pre-WW2 German debts dealt with in the 1953 London Agreements, for between the wars, German public and private borrowers embarked on a massive borrowing spree, such that by 1932, the German share of total world debt was about 14%. Almost 12 percent of all foreign loans issued in the United States between 1924 and 1929 went to German cities.
As the table below shows, the borrowers in US Dollars were heterogeneous in nature:
By the time that preparations were taking place for the London Conference of 1953, pre-war German debt (including Dawes and Young loans) were estimated to total $2.5 billion (1953 ≈ $22 billion 2015).
On 30th January 1933 Adolf Hitler was appointed Chancellor of Germany by Hindenburg, and the new regime wasted no time in abrogating payments on its debt. Rather than openly declare default, it “pursued a complicated policy motivated less by respect for the sanctity of debt than their need to maintain trade ties with their creditors.” In March, in a speech to the American Chamber of Commerce in Berlin, the Reichsbank president Hjalmar Schacht had clearly and somewhat cynically telegraphed his ultimate intentions, saying “I believe one could name several South and Central American republics which defaulted three or four times, but have always been given credit again.” On June 14th, 1933, he announced that from July 1, half of the debt service on any foreign denominated bonds would now be paid in special inconvertible scrip issued by the Reichsbank. In today’s world of Credit Default Swaps, in which defaults are very precisely defined, this would undoubtedly be an event of default.
By 1934, Germany defaulted entirely on the Young and Dawes loans, though after pressure from London it once again started servicing the UK tranche only. By the time the war started, German debt service had largely ceased (though both private and public authorities had been repurchasing their bonds quietly on the open market (see Klug)).
We have already stated that the majority of the German extant debt under negotiations was incurred after 1945. Whereas pre-war debts totalled some $2.5 billion (1953 ≈ $22 billion 2015), debts incurred after 1945 were about $3.5 billion (1953 ≈ $30.5 billion 2015). The total under negotiation therefore amounts to about $52.5 billion 2015.
The German negotiating delegation was led by Hermann-Joseph Abs, and the 1953 troika consisted of France, the United Kingdom and the United States. Negotiations ran from 27th February to 8th August 1953, though the Agreement is dated 27th February. It entered into force generally on the 16th September 1953.
Some of the details of the agreement follow:
The 7% Dawes Loan 1924
Interest was reduced to 5 ½ % on the US tranche and to 5% on all others. After March 1958, a sinking fund of the principal of 3% for the US tranche and of 2% for all others would be applied. Final maturity would be in 1969. Accumulated unpaid accrued interest to be recalculated at 5% and paid for with a 20-year German Government 3% bond with a 2% sinking fund after 5 years. Bonds for the accrued owed before 1944 to be issued in payment in 1953; that for monies owed and accumulating between 1944 and 1953 to be issued upon the reunification of Germany.
The 5 ½ % Young Loan 1930
A similar scheme as for the Dawes loan, but with 5% interest on the US tranche, 4 ½ % on others, a 1% sinking fund from after March 1958 on all tranches, and a final maturity of 1980. A 20-year 3% German Government bond with a 1% sinking fund after 5 years to cover accrued interest recalculated at 4 ½ %, with similar terms on accruals between 1944 and 1953.
Young loan bonds were to be repaid in the currency of origin, converted to US$ at the rate prevailing at the time of issue and then back into the currency of origin at the rate prevailing on 1st August 1952. A table summarising the effects is below:
It goes without saying that the gold clause did not apply, although this was hotly argued during the negotiations. But there would be a further devil in the details popping up later as a result of clause (e).
The 6 percent External (Match or Kreuger) Loan 1930
Interest reduced to 4%, sinking fund from March 1958 at 1 ¼ %, final maturity 1994, accrued recalculated at 4%, and otherwise treated the same as the Young loan.
New terms and conditions are applied to every class of every type of borrower, public and private, with the only anecdotally worthy item occurring with bonds of the State of Prussia (which had simply been abolished): the 16 years of accrued interest (from the end 1936 to March 1953) were deferred “until such time as the territories belonging to the State of Prussia and now outside the territory of the Federal Republic shall be joined to the Federal Republic, at which time payment shall be subject to negotiation”. And the negotiators could not reach agreement on Austrian government debt, which was held over for further, separate negotiations.
We have already mentioned in the third paragraph of this note what were the overall terms of the Agreement. However interesting may be their details, of more importance then and now were the structure, principles and atmosphere surrounding both the preparations and the negotiations themselves.
The Conference on German External Debt which drew up the guidelines and principles upon which the Agreement negotiations were based stated in its final report that “The Conference recognised the principle that the transfer of payments under the Settlement Plan implies the development and maintenance of a balance of payments situation in which those payments, like other payments for current transactions, can be financed by foreign exchange receipts from visible and invisible transactions so that more than a temporary drawing on monetary reserves is avoided. …. It recommends that due account should be taken by all concerned of the principles referred to in this paragraph. Transfers of interest and amortisation payments due under the Settlement Plan should be treated as payments for current transactions and, where appropriate, included in any arrangements relating to trade and / or payments between the Federal Republic and any of the creditor countries, regardless of whether such agreements are of a bilateral or multilateral nature” In its Memorandum on the Agreement on German Foreign Debt presented to the Bundestag with the necessary legislation to pass the London Agreement, the German government stated that the principle whereby “the payment of transfer commitments must only be made from a current surplus in the balance of trade and current accounts” had been “unanimously agreed by creditors and debtors, and by the representatives of all 31 countries”.
Consultation in the event that Germany had a difficulty in making payments was included, in Article 34 (b), which states in part “if the consultations are concerned with a situation in which the Federal Republic of Germany finds that it is faced with difficulties in carrying out its external obligations, attention shall be given to all relevant economic, financial and monetary considerations which relate to the ability to transfer of the Federal Republic of Germany, as influenced by both internal and external factors… Due regard will be paid to the principles by which the Conference on German External Debts was guided, to the objectives at which it aimed and to the undertaking of the Government of the Federal Republic of Germany to do everything in its power to ensure the fulfilment of these obligations. Advice shall, if the principal consulting Parties to the present Agreement so decide, be sought from appropriate international organisations or other independent experts.”
Eight years after the war, Germany was treated as an equal. As Guinnane puts it “The agreement embodied three general principles: the amount Germany owed was reduced considerably; she was given a long period in which to repay; and the amounts owed in any given year were tied to her ability to make transfers.” Jürgen Kaiser states “Germany was explicitly spared from any “structural adjustment” policy – i.e., budget cuts, tax increases, and so-called structural reforms in the interest of ongoing debt service payments to the outside world.” No IMF conditionality here then. Indeed, Abs himself states in his autobiographical account of the negotiations that they included “an explicit rejection of Anglo-Saxon austerity”.
One cannot suggest that a template be created from the details of the Agreement: a cookie-cutter approach is not appropriate when renegotiating international sovereign debt. Too many variables are involved. The US, which received the largest haircut, both absolutely and relatively, might not be so sanguine today, both for financial reasons and geopolitical ones: “West” Germany is no more and nor is the Soviet Union.
In addition, to get out of debt you have to come into it first: many will say that paralleling contemporary debt problems to Germany’s in the 20th Century is comparing apples to oranges. But notwithstanding the cliché, there are many similarities between apples and oranges: fruit, vitamin C, shape, size; and in why we grow them and how we handle them. It is precisely by comparing them that we can highlight both similarities and differences. And in this instance we should be able to learn from both.
So several general lessons should nevertheless be retained: treat the debtor nation as a partner, and with respect, and with generosity, avoid the collective punishment of its people, do not try to be paid what cannot be afforded. In other words be sensible. These lessons are not new: words to that effect abound in earlier literature about debt and debtors. We just seem to have lost sight of them.
Annex I, D, 11 of the Agreement states in its entirety:
“Græco-German Arbitral Tribunal claims
A preliminary exchange of views has taken place between the Greek and German Delegations in regard to claims held by private persons arising out of decisions of the Mixed Græco-German Arbitral Tribunal established after the First World War. This will be followed by further discussions, the result of which, if approved, should be covered in the Intergovernmental Agreement.”
In 1972, almost 20 years after the Agreement (to which Greece was a party), in “Claims arising out of decisions of the Mixed Graeco-German Arbitral Tribunal set up under Article 304 in Part X of the Treaty of Versailles (between Greece and the Federal Republic of Germany)” the same Arbitral Tribunal referred to in Footnote 18 above ruled in part as follows:
“The negotiations to be conducted … (note: between Greece and Germany) must be guided by the following principles:
(a) They shall be meaningful and not merely consist of a formal process of negotiations. Meaningful negotiations cannot be conducted if either party insists upon its own position without contemplating any modification of it.
(b) Both parties are under an obligation to act in such a way that the principles of the Agreement are applied in order to achieve a satisfactory and equitable result.”
In the arguments to the Tribunal, the Counsel for the Kingdom of Greece complained that in the light of previous failures to reach an agreement “there was danger of the Kingdom of Greece receiving ‘a stone instead of bread’.”
This dispute just happened to be between Greece and Germany, but the italicised and bold text above applies to all negotiations at all times.
We do not know what happened next in this dispute. We do know what is happening now.
Abs, Hermann-Josef (1991): Entscheidungen 1949 –1953. Die Entstehung des Londoner Schuldenabkommens. Mainz-München
Agreement on German External Debts, 27th February 1953
Dernburg, H. J. – Some Basic Aspects of the German Debt Settlement – The Journal of Finance Vol. 8, No. 3 (Sep., 1953)
Final Report of the Conference on German External Debt 1952
Foreign Affairs – October 1934 -The Dawes and Young Loans: Then and Now –
Gelpern, Anna – Feb 2015 – Pari Passu’s Golden Fossils (Very Preliminary Draft)
Guinnane, TW – January 2004 – Financial Vergangenheitsbewältigung- The 1953 London Debt Agreement – Economic Growth Centre Yale Discussion Paper 75
James, Harold – 1986 – The German Slump: Politics and Economics 1924-1936. Oxford: Clarendon
Kaiser,J – 2013 – One Made it Out of the Debt Trap – Lessons from the 1953 London Agreement – Freidrich Ebert Stiftung – International Policy Analysis
Klug,A – November 1993 – The German Buybacks 1932-39- A cure for overhang? – Princeton Studies in International Finance No75
Schacht, Hjalmar – March 16, 1934 -“The Problem of Germany’s Foreign Indebtedness.” Address by the President of the Reichsbank before the American Chamber of Commerce in Germany, Berlin; printed by the Reichsbank
UN Reports of Arbitral Awards – 26th January 1972 – Volume XIX pp27-64 : Claims arising out of decisions of the Mixed Graeco-German Arbitral Tribunal set up under Article 304 in Part X of the Treaty of Versailles (between Greece and the Federal Republic of Germany)
UN Reports of Arbitral Awards – 16th May 1980 – Volume XIX pp 67-145 : “The Question whether the re-evaluation of the German Mark in 1961 and 1969 constitutes a case for application of the clause in article 2 (e) of Annex I A of the 1953 Agreement on German External Debts”
 H. J. Dernburg – Some Basic Aspects of the German Debt Settlement – The Journal of Finance Vol. 8, No. 3 (Sep., 1953), p. 299
 The Dawes and Young Loans: Then and Now – Foreign Affairs October 1934 part III §1
 “Under the 1924 Dawes Plan, Germany borrowed approximately $200 million from foreign bondholders in U.S. dollars, British pounds, Italian lire, Swedish kronor, and Swiss francs. The Dawes Plan Loan (as the bond issue was called) was part of a deal to resume reparations payments and help stimulate the German economy. The Dawes Loan bonds had priority claim on Germany’s foreign exchange, and were secured by certain tax revenues. The U.S. dollar tranche alone was indexed to gold to protect the creditors from currency depreciation.” Anna Gelpern – Feb 2015 – Pari Passu’s Golden Fossils (Very Preliminary Draft)
 The difference of 10% corresponded to fees and costs!
 “The Young Plan Loan raised approximately $300 million, with bonds denominated in French francs, U.S dollars, British pounds, Swedish kronor, Dutch florins, Swiss francs, German reichsmarks, Italian lire, and Belgian belgas, listed in order of the respective tranche sizes. Two thirds of the proceeds went to pay reparations; the rest to the German government for investment in railways and the postal service. In contrast to the Dawes Loan, all the Young Loan tranches were indexed to gold at their value on the date of issue.” Ibid. See also The Dawes and Young Loans: Then and Now – Foreign Affairs October 1934 part III §6
 Foreign Affairs 1934 Part IV
 The London Protocol of 1931
 The Lausanne Conference of 16th June – 9th July 1932
 The US concessions required were never granted and the whole process was quickly overtaken by world events.
 Klug,A – November 1993 – The German Buybacks 1932-39- A cure for overhang? – Princeton Studies in International Finance No75, pp 5 & 8
 Guinnane, TW – January 2004 – Financial Vergangenheitsbewältigung- The 1953 London Debt Agreement – Economic Growth Centre Yale Discussion Paper 75 p 16, citing James, Harold, 1986. The German Slump: Politics and Economics 1924-1936. Oxford: Clarendon Press p 95
 Klug,A, p.8
 Guinnane, p. 18
 “The Problem of Germany’s Foreign Indebtedness.” Address by the President of the Reichsbank before the American Chamber of Commerce in Germany; Berlin March 16, 1934; printed by the Reichsbank. Cited in Foreign Affairs 1934
 Agreement on German External Debts, 27th February 1953 (“Agreement”)
 Agreement Annex I,A,1 (a) to (d)(p20)
 Ibid Annex I,A,2 (a) to (d)
 Dernburg p.305
 Clause (e) states “Should the rates of exchange ruling any of the currencies of issue on 1 August 1952 alter thereafter by 5 percent or more, the instalments due after that date, while still being made in the currency of the country of issue, shall be calculated on the basis of the least depreciated currency (in relation to the rate of exchange current on 1 August 1952) reconverted into the currency of issue at the rate of exchange current when the payment in question becomes due.” Later arguments occurred when the Deutschemark revalued significantly on two occasions: is the least depreciated currency the most appreciated one? See “The Question whether the re-evaluation of the German Mark in 1961 and 1969 constitutes a case for application of the clause in article 2 (e) of Annex I A of the 1953 Agreement on German External Debts” ruled upon on 16th May 1980 by the Arbitral Tribunal created by the Agreement. The 82 page decision (including a dissenting opinion of some 30 pages) is a cornucopia of interesting precedents, including “The Case of the Northern Cameroons”. Exegetical scholars will enjoy the fact that the Agreement was written in three languages (English, French and German), none of which took precedence.
 Agreement Annex I,B,2,iii
 Agreement Annex I,E,15
 Final Report of the Conference on German External Debt 1952: paragraphs 21 etc
 Quoted by Kaiser,J – 2013 – One Made it Out of the Debt Trap – Lessons from the 1953 London Agreement – Freidrich Ebert Stiftung – International Policy Analysis
 Guinnane p.27
 Kaiser,J – 2013
 Abs, Hermann-Josef – 1991 – Entscheidungen 1949 –1953. Die Entstehung des Londoner Schuldenabkommens. Mainz-München p.195
 UN Reports of Arbitral Awards – 26th January 1972 – Volume XIX pp27-64, P. 64
 Ibid P. 63