Learn from history: how Ireland, Greece and Spain forgave Germany’s debts


Bankruptcy of states – that has long been seen as a faraway problem of the so-called Developing World (the Global South). Today it is not far away at all but directly in front of our own doors. An economic emergency as a consequence of over-indebtedness threatens the very existence of the European monetary union. On-going social and political devastation in the crisis-ridden countries threatens the social fabrics of those countries. Germany, however, seems to stand apart as a relatively successful and flourishing economy. However, this has not always been the case.

Not many people know that generous debt relief was availed of by Germany at the beginning of its ‘economic miracle’. Among modern sovereign debt restructurings, the ‘London Debt Accord’ for Germany, which we celebrate the 60th anniversary of on the 27th of February, is an early and little known example – which is all the more surprising because it was so successful in restoring (West) Germany’s debt sustainability. By the end of the negotiations, half of all debts of DM 30 million had been cancelled and the remainder had been rescheduled in such an intelligent way that Germany never faced a debt problem again.

In their history classes German children usually do not learn about the Accord and in the media there is also little consideration given to it. However, today, it would be wise to remember how a looming state bankruptcy was prevented through timely, fast, comprehensive and fair negotiations.

The contrast between the historical treatment of Germany with the current treatment of Greece could not be more obvious. Germany received far-reaching debt relief and as a result its economy grew quickly and sustainably. Greece, in contrast, is being forced to ‘consolidate’ itself into a painful and destructive recession that shakes the society to its very foundations. One of those generous (to Germany) creditors in 1953 was, by the way, Greece, irrespective of the war crimes that the German occupation force had committed just a few years before in Greece.

Few sovereign debt restructurings as that of 1953 have so clearly marked the transition from a state of critical indebtedness to a situation where debt is no longer an obstacle to economic and social development. The agreement is still today one of the best historical examples of how reasonable and sustainable a debt work-out can be – if the political will is there.

‘London 53’ is worth re-examining today as an example and source of guidance for current discussions about debt relief, both for countries of the Global South and in the context of the present state insolvency crisis within the Eurozone. Let us remember this vital piece of largely forgotten history! And let us commit again to taking responsibility for treating over-indebted countries in a timely and fair manner.

Kristina Rehbein and Jürgen Kaiser, erlassjahr.de – Entwicklung braucht Entschuldung e.V. (Germany)

Isabel Castro, Iniciativa de Auditoria Cidadã à Divida Pública – IAC (Portugal)

Eric LeCompte, Jubilee USA Network (USA)

Iolanda Fresnillo, Plataforma Auditoria Ciudadana de la Deuda – PACD (Spain)

Bodo Ellmers, European Network on Debt and Development (Belgium)

Nessa Ní Chasaide, Debt and Development Coalition and Andy Storey, Debt Justice Action’s Anglo: Not Our Debt (Ireland)

Nick Dearden, Jubilee Debt Campaign (United Kingdom)

1. What is the London Debt Accord?

February 27th 1953 is the day on which the ‘London Debt Accord’ was signed, an extraordinary agreement that cancelled much of Germany’s pre-war and war debts. The exceptional character of the agreement is that it was signed by countries that had been at war only a few years previously: on the one hand, the highly indebted new German Federal Republic (the successor to Hitler’s Germany), and on the other, Germany’s creditors, the western Allies, led by England, France and the USA.

2. How Much of Germany’s Debt was cancelled?

Germany had been destroyed by war, and was incapable of paying its external public debts in the post-war years. Despite some previously agreed reduction in its post-war debt, its pre-war debts remained enormous and unpayable. About 50% of Germany’s debt was cancelled, worth 30 billion DMs, or 150% of Germany’s exports in 1950. Of Germany’s remaining debt stock, further relief was granted through a reduction in interest on its different facets.[1] The London Conference agreed a comprehensive solution on how to deal with Germany’s outstanding debts relating to two constituent parts:

  • Loans that Germany had taken out during the time of the Weimar Republic to meet the reparation arrangements of the 1919 Treaty of Versailles, which had twice been rescheduled and later partially cancelled.[2] In addition, there were the debts of other public institutions and German private debtors to the tune of 5.8 billion DM, so that all pre-war debts of 13.5 billion DM were established and discussed.
  • Loans that the federal government had received from the western powers, in particular the USA, after the Second World War to finance the reconstruction.[3]

Who was involved?

The conference on pre-war debts met from 28th February to 28th August 1952 in London. 22 representatives from creditor countries took part, the Bank for International Settlements (BIS) and representatives of private creditors. The driving force behind the negotiations was the USA. During the negotiations (between 1951 and 1953) German private and public debt owed to public and private entities from the following countries was dealt with who are signatories to the Agreement:

Belgium, Ceylon (today: Sri Lanka), Denmark, France, Greece, Iran, Italy, Yugoslavia, Canada, Liechtenstein, Luxemburg, Norway, Pakistan, Sweden, Switzerland, Spain, South Africa, Britain and the USA. Until 1963 the following states and territories acceded to the accord:  Aden, Egypt, Argentina, Australia, Belgian Congo (today DRC), British Channel Islands, Chile, Finland, Falkland Islands, Gibraltar, Israel, Cambodia, Cameroon, Malta, Morocco, New Guinea and Nauru, New Zealand, Netherlands, North Rhodesia and Njassaland, Austria, Peru, Syria and Thailand.

3. What are the lessons for today’s debt crisis in Europe and the wider world?

Negotiated settlements to debt crises are possible

  • The London Accord demonstrates that it is possible for multi-lateral stakeholders to negotiate comprehensive debt cancellation agreements even in highly politically sensitive contexts. The implementation of the agreements within the Accord was highly cooperative. Despite 6 different arbitration fora being established to deal with conflicts arising as a result of the agreements within the Accord, these dispute mechanisms were rarely needed. Germany was also granted the option to call for “consultations” in the event it faced unforeseen difficulties in mobilising its debt service. However, no German request for consultations is on record.
  • The “guidelines for the recommendations” laid out for the Accord acknowledge the need for humane treatment of the borrower. It states the agreement should

(i)        take into account the general economic situation of the Federal republic and the effects of the limitations on its territorial jurisdiction; it should neither dislocate the German economy through undesirable effects on the internal financial situation, nor unduly drain existing or potential German foreign exchange resources (…)

(ii)       provide for an orderly overall settlement and assure fair and equitable treatment of all the interests affected.”

  • The breathtaking self- confidence applied by the German delegation is notable through their achievement of gaining a significant debt write down, and indeed, using the agreement as an instrument to ward off possible future reparation demands. The German negotiator Hermann Josef Abs reported in 1959:

“There was only one point on which it proved impossible to reach an agreement with the creditors and to embody it in the final conference report – and that is the question of the political preconditions under which we could implement the debt agreement, namely the problem of reparations. (…) But the German delegation had declared – very clearly and in all seriousness –  in the most important final session, that Germany would not be in a position to implement the debt agreement, if demands were still to be made to it under the heading of  ‘reparations’.”

After 1953, Germany made no reparation payments of the kind that were agreed in 1919.

  • The Agreement happened in such a definite manner, there was practically no more discussion, either internally or externally, on the subject of Germany’s national debt for many decades afterward.

The large scale of debts and types of debts considered

  • One of the unique features of the London Accord is that it did not only deal with the debt of the German state and its various predecessors, it also included all external obligations of the German economy, i.e. those of individuals and enterprises. In the interests of an arrangement that would be unified and equally binding on all debtors and creditors, a principle of equal treatment for all debtors and creditors was agreed. All claimants had to accept equivalent cuts in interest and repayment demands. All non-public debtors benefited from the same relief, which the federal republic’s creditors had granted it in the interests of maintaining its capacity for economic development.[4]
  • Thanks to the various safeguards in the agreement and the generous level of debt relief, Germany had very low public and external debt indicators until the onset of the recession in the 1970s. Only from the 1980s onward, then due to the costs of the reunification and finally to the global financial crisis in 2008, Germany’s debt/GNI indicator rose to the 80% range, where it still is today.[5]
  • The deal made a significant contribution to the German boom of the fifties and sixties and to a speedy reconstruction of the devastated country.

Debt resolution can be achieved if the political will is present:

The agreement and its generous terms demonstrate:

  • The strong commitment of the Western Allies not to repeat the mistake committed after WW I, namely to destabilize a defeated enemy politically and socially by imposing an un-payable debt burden.
  • The ability of the then Adenauer government to capitalize on Germany’s unique position as a cold war front state. Without this latter point, the ultimate relief might have been somewhat less generous, had it not been considered to be a contribution towards the Cold War ‘effort’.
  • While the leading role of the United States was clearly visible, many subscribers to the accord later became members of the ‘Non-aligned Movement’, or were neutral from the outset – such as Switzerland.

[1] 2.5 billion DM stayed interest free, 5.5 billion DM were carried a rate of 2.5% and the remaining 6.3 billion DM an average rate of 4.5 to 5%. Compound interest was not charged for the long period during which the debt had not been serviced.

[2] According to the agreement reached in London, these amounted to 7.7 billion DM.

[3] These amounted to about 16.2 billion DM.

[4] The repayment plan agreed in London initially allowed for a grace period of five years between 1953 and 1957, in which annual interest of 567.2 million DM had to be paid. From 1958, fixed repayment and interest rates of 765 million DM were agreed.

[5] Payments expired in the 1980s. Some additional payments fell due, due to German reunification in 1990, which Germany had waived in London, because it did not “exercise full control over its territory”. When it did so, from 1990 onwards, it resumed payments and the last tranche of € 56m was paid to bondholders on Oct. 3rd 2010