Thursday, January 22, 2015

Germany's Debt Forgiveness of 1953 - The Wrong Precedent!

Germany's debt forgiveness back in 1953 is now being universally cited as the proper precedent to justify a haircut for Greece. I think that this is an extremely poor example. To me, Germany of 1953 is a classic example of a mistaken haircut.

Assume the amount of debt which was forgiven in 1953 had, instead, been converted into a 50-year bond with an interest rate adjustable to something (perhaps GDP; perhaps government revenues; etc.) and a 20-year interest capitalization period. No cash outflow would have burdened the German economic miracle during the next 20 years. At the same time, the German economic miracle would have put Germany in a position to pay all debts which it had assumed. The classic example of making a borrower strong enough so that he can pay his debts.

By 1973, Germany would have easily been in a position to pay annual interest on the bond. And by 2003, Germany would have easily been able to repay or refinance that bond.

And the moral of the story is? Well, if you want to get money back from a poor borrower, the first priority must be to make the borrower strong again. If you only forgive his debt, he may have less debt but he remains poor.


  1. So, repayment would have started just in time for the oil shock of '74? That would have been just great, Klaus! {/snark}

    But, seriously, after all we've learned about Greece in the last five years, you still believe a foreign lender could turn this messed up country into a strong economy? Wow, what optimism!
    Imho it's hard enough to turn this hellhole even into something resembling a mediocre economy. And to achieve this, a debt forgivance would be totally counterpriductive, because the lenders need the leverage to force the unwilling political class into reforms. Totally contrary to 1950s Germany, Greece simply isn't able to create even a small Wirtschaftwunder on its own.

    1. yes but with the diffrent that grecce not kill 100.000.000 people
      in 2 worldwars.

  2. Simplistic. Depends on the capital and on the interest rate.

    If, at year 15, I was about to start a business in Germany I would definitely take into account the coming tax increases to repay the coupon, so the German miracle, under those circumstances, is not guaranteed.

  3. Unforgettable Professor Dr. Heiner Flassbeck...

    The Paradox of the Creditor Debtor Relationship - Germany the Debtor Nation

  4. Unforgettable Professor Jeffrey Sachs...

    Let Greece profit from German history
    As with Germany in 1953, the real issue is Greece’s need for debt relief, not whether it is deserved

  5. Sachs very much misses the point: In negotiations, you don't concede ANYTHING before the other side has even come to the table! Period.
    Really, does everybody think Merkel and the rest of the Troika are total idiots? Grant a debt relief now and a possible Syriza government, maybe even a ND one, will use that leeway for funding election gifts by credits, at unsustainable interest rates! Just like in the bad old past.
    No way, this won't be allowed to happen. The high debt works as a safeguard against that. There may be better a better deal sometime in the future, but only for a government that proves it's fiscally responsible. That's only reasonable.

    Sachs, like many economists, must be very much ignorant about political realities to not think about this.

  6. Very interesting article by Roland Tichy, former editor of Germany's Wirtschaftswoche

  7. The linking of repayment to export performance seems to be a valuable aspect to the German deal; however, perhaps in Greece's case this could be inverted. They only pay if they fail to up the export to GDP ratio. Could have perverse consequences in the raw form, but with a little finessing it could be just the tonic needed to get real economic change. Make them strong.

  8. Mr. Kastner,

    You think only of numbers, you need to think as politician. There is reason to think that Tsipras will agree on an extension of debt. There is also reason to think that Tsipras, in the worst case, could accept a mini haircut and extension of the rest, as he could easily sell this to the people, if he were to return with a "non austerity" or "mild austerity" program. However, it is not like Germany will simply say to Tsipras "Hello Alexis, i am Angela, lovely to meet you, before we begin, let me extend your debt!". No.

    This was what Merkel told poor Samaras:

    The WSJ reports that Ms. Merkel asked an interpreter to translate “debt relief", and then told Mr. Samaras “it doesn’t sound as good in German”.

    Samaras, had bet his political existence on this:
    Those governments declared in November 2012 that they would be willing to make further concessions once Greece achieved a primary surplus—it did for the first time last year—and implemented all of the conditions of its bailout program

    Samaras plan was quite sound: "I satisfy the troike, have Schauble say i am a success story, take the debt relief promiced, go to the presidential elections and with the debt relief at hand, give an alibi to some of the smaller parties to vote with me Dimas as President". Or, worse scenario, go to elections, with 3 cards: "primary surplus, grown (Alpha Bank last week said that calculates growth to 1.9% in the last trimester of 2014 i think), debt relief". Samaras story, would be "see, the change is coming, don't let everything drop now".

    And, it may have worked actually! Personally i think he may have even elected president, because the small parties would a good alibi ("we do it for the sake of stability, now that we finally see a light at the end of the tunnel").

    Tsipras, has seen Samaras being played and so he (prof. Varoufakis,that is) for another stance: "I go in fully armed and with maximum of demands". Tsipras, if you ask me, isn't too concerned about a 1953 solution. However, he will use this as mediatic weapon against Merkel, together with her 2012 signature. Tsipras will say both to Merkel and to the press "On what moral ground, does Mrs. Merkel deny a debt restructuring, when Germany herself got one in 1953?".

    You will protest "but, but, Germany also got a high commissioner!". These are minor details that won't ever bother the press, they have no meaning mediatically, Tsipras isn't going to analyze that, just like Merkel doesn't want to mention to the press the 2012 Eurogroup signatures. Tsipras (prof. Varoufakis) is well aware that he will have a media war on him too (already does), so he prepares his own media weapons. Did you see how in a few months, Greece passed from "success story", "goodbye grexit", "Grecovery", "Greece reforms champion", to "Grexit", "Greece doesn't do reforms", etc? Speaks volumes about the corrupt relation between goverments and mass media.

    1. The mood has swung against Greece again because Syriza, and later ND, too, all talked about generous gifts to the voters ("free electricity") instead of any reforms that would help the economy to create new jobs. Who shall believe in the future government at least being somewhat reasonable when Tsipras seriously see the public sector as the primary one (hello? Communism evidently failed!) and wants to fund half of his 12 billion stimulus program with EU funds that have been created for very much different issues? Such utter nonsense doesn't inspire any confidence about Greek sanity in the rest of the EU! No surprise at all, imho, that there is a lot of concern again if the Greeks should be in the Eurozone at all. Such idiocy as being voiced in the last months raises severe doubts if there is enough reason left in that country to continue the urgently necessary modernisation that is the very foundation of any better future. If Greek voters want to surport surreal ideas (like the Hungarians did, only in the other extreme), that's their choice, but then they shouldn't expect any more support from other Eurozone countries. Then it's better to cut the losses and call it quits.

  9. The funny thing with Merkel, is that, she had the chance to help Samaras and she prefered to play deaf. With Samaras, whatever she will concede now to Tsipras, she could have conceeded half of it and Samaras would have been thrilled about it and turned it to a media huge success.

    Now, Samaras is seen in Greece as "dead meat". I despise Tsipras, yet i can't vote for Samaras. Not because he says the wrong things about the way the economy should be built, but because the best thing he can do to help both his party and Greece, is to step down.

    So i am pondering whether to vote for Tsipras or simply abstain. The only reason to vote for Tsipras, would be, to finally give Merkel a bit of a real headache. Many right wing voters will vote Tsipras just for that. Worst case scenario? Greece goes to drachma. Well, it will go under the left, so Tsipras will take the blow, so it isn't so bad. Samaras' policy wouldn't be socially/politically tolerable anyway for much longer. It would be suicide to attempt to have 10 beur primary surplus for 10+ years. So, if one must choose the way to go down, he may as well do it guns blazing, don't you agree?

    1. For a Greek politician, Samaras may have been daring with his half hearted implementation of the few reforms he actually accomplished, but from the outside view, like Merkel's, the modernisation process has only been dragging along with no reason for enthusiasm at all. Other countries' governments have accomplished much more, the comparison isn't flattering for Athens. Thus, the lack of positive feedback for Samaras.

      And then, the news reports of the last months have shown that there is a growing sentiment among German politicians that a Grexit would be no big deal. After five years of the Greek mess occupying the headlines, very much dissapointing experiences with Greek governments, and a lot of Greek vitriol being directed at
      Germany, everybody here is sick and tired of the issue and would love to get out of this madness, losses be damned.

      Who in his right mind would want that unrewarding job of shepherding such cattle who seem to be infected by mad cow desease, really? Even for the most tolerant (not to say masochistic!) guy there comes a point where the BS has to stop. The Troika simply can't stand the madness any longer!

    2. I agree with your thoughts and comments. But don't over dramatize. 1st we need a governemtn to be formed. Whatever it may be. Imperative. if we do not and need new elections that is when i worry. If we do form a governement, negotiations (quickly) will be made and we will continue.

      We will not be kicked out of the euro, we will not go to the drachma.... we were in worse shape in 2009 and 2012. our debt is bigger now hence our burden is a bigger problem. deal will bne made and concluded.

      With Syriza i believe they will achieve this. If ND, they will also achieve this now. Either or a deal will be made.

      By Easter we will have new taxes and new measures. I guarantee it. Don't worry. :-)

      @ Mr. Gray:
      Greece has a very good small economy and produces many things. Stop being so prejudice.

    3. Prejudice? I'm judging from facts! Take a look at this chart, pls:
      And now tell me why anybody should think that Greece belongs into the Eurozone? Remember, other countries had to deal with the Troika, too! They worked hard to get out of the mess. Only Greece is a hopeless case. Sorry, but at which point is it ok to say that this doesn't work out and that going seperate ways may be better?

    4. Three patients go to surgery. One goes for heart transplant, one goes for appendicitis, the 3rd for tonsillectomy. The 2nd patient survives and is out of the hospital in 1 day, the 3rd patient has a non critical lung infection, the first person can't walk himself home and must remain in hospital. Why didn't the 1st patient walk home after 1 day?
      You are what you read.

    5. Because he ruined his health with his devil-may-care lifestyle of the past! In your very own example, it's obvious the hospital is doing its best and is not to be blamed. A patient with a serious heart problem who refuses the necessary operation can only be sent home, with the very best wishes!

  10. Mr. Kastner,

    To give you, in a simple way, the narrative that Tsipras wants to start with, compared to what Samaras is trying to sell now. You will see that a debt solution, won't be Tsipras' main issue.

    - Samaras, as things have turned, goes into elections, with this narrative: "Fellow compatriots, Schauble said i have carried on a successful program. Klaus Regling, said i am champion of reforms! The primary surplus, under my englightened leadership, before Tsipras' populism started in December stopping people from paying taxes, is at 3,9 beur! What a difference compared to the huge deficit of 2009! Unemployment is skyhigh, but it is dropping, well, by snail pace. Let us continue, to greater heights, in this path of success! By 2016, we will bring the primary surplus to 9 beur and keep it at 4.5% for at least until the debt drops to 122%. Let's celebrate this success, by cutting more on wages and pensions and i have a new VAT increase for you! The last part is what spoils the celebration.

    - Tsipras wants to say: "I solved the debt problem, the annual payments i have agreed upon, are very small, plus, i got breathing space for until the economy grows. We will address immediately the humanitarian problem, give raises to minimum salary and low pensions, this is our success story."

    You think the people will hold a grudge on Tsipras if instead of the famous "haircut of at least 50%", he gets an extension and a reduction of the primary surplus for X years? Tsipras will be dancing around, if he manages to push the debt of the next few years in particular, because it will free resources for his program. By the time the yearly payments will be a problem again, he may be opposition and remind the people of how better their living was with him...