Monday, June 29, 2015

The Power of Forgiveness

After World War II, European nations benefitted from today's equivalent of $120 billion in reconstruction loans (under the Marshall Plan). The single largest benefactor of this program was West Germany.

The London Conference, 1953. West Germany signs papers.
At a conference held in London in 1953, West Germany’s creditors (US, UK, France, Belgium, and 17 others) agreed to an important reduction of Germany’s outstanding debt. Amounts borrowed between the wars and immediately afterwards were reduced by 62.5%. A debt moratorium of five years was granted, and claims for war debt and damages were postponed sine die (which is to say, with no planned resumption date). Additionally, repayment terms for the remainder of German debts were rewritten, on very favorable terms, to allow Germany to rapidly reconstruct itself and its economy.

What, exactly, are "very favorable terms"? Well, for example:
  • Germany was able to repay most of its debt in its own currency, even though the Deutschmark had little value. The Deutschmark was neither a safe currency nor a strong one. (It is very rare that creditors accept that a country repay in its own currency if it is a weak currency. Usually hard currency, such as Dollar, Yen, or Pound, etc., is demanded.)
  • Creditor countries promised to buy German goods in order to create an export market that would in turn produce commercial income, foreign exchange reserves and a healthy balance of payments.
  • The creditors accepted that, in case of litigation with Germany, the German courts would be competent.
  • It was decided that Germany would not use more than five percent of its export revenues to repay debt.
  • Interest rates would not be higher than five percent and in some cases could be renegotiated and reviewed downwards.

Why did the creditors offer such generous terms? First, for humanitarian reasons. Secondly, because it was understood that a strong German economy would be essential to Europe's broader economic recovery. And thirdly, the U.S. (and other creditor nations) knew they needed a strong ally near the USSR border.

Some observers have said that the German example is not terribly analogous to Greece in terms of a case for debt restructuring, since a strong Greek economy is not central to a strong European economy, and the geopolitics of Greece are not the same as West Germany in 1953. But do these assertions really stand up? If Greece fails, it could bring down the precious snowflake that is the Euro, while trashing Europe's laughably weak "economic recovery." (Already there is much talk by ECB of "contagion," "infection," etc. regarding Greece, as if Greece is a germ or virus.) Also, is it not perfectly clear that, in the event of Grexit, the Greeks will have no choice but to explore ties to Russia? They need the pipeline money.

Perhaps the creditors should take a fresh look at Greece. Germany, in particular, should take a fresh look. Germany knows, better than anyone, the good things that can come from forgiveness.

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