Thursday, May 10, 2018

ESM's Klaus Regling: Germany's 1953 Debt Restructuring A Model For Greece?

Klaus Regling, head of the European Stability Mechanism (ESM), this week drew a parallel between Greece today and postwar Germany in a speech in Aachen, Germany. Germany, he reminded the audience, had repaid the last instalment of the 1953 debt restructuring only in 2010. Successful debt restructuring was all a matter of long tenors, according to Regling.

Regling casually overlooked a few details in his speech. One, a very major debt forgiveness had been part of the 1953 debt restructuring (50% of all debt). And, two, there was the Marshall Plan which provided a key stimulus for the unfolding Wirtschaftswunder in Germany.

But still, the valid question is: Would the Greek economy experience its own Wirtschaftswunder if only a sufficient external stimulus and adequate debt relief were given? That is really the key question haunting Greece observers since 2010. Yanis Varoufakis, for one, had argued tirelessly in his blog, long before he became Finance Minister, that only a major public stimulus could get Greece out of its depression because, he said, when the situation is as depressed as it was/is in Greece, no private initiative could accomplish this goal.

One thing is certain: whenever there is an economic problem and one throws money at it, there will be an improvement. If Greece were given, as a present, say, 10 BEUR, the Greek state would spend most of that money domestically. The expenses of the state are incomes/revenues for privates. The privates, in turn, spend their new incomes/revenues and they become incomes/revenues of others. And so forth.

But here is the great uncertainty: Will that initial improvement trigger a lasting recovery or will it only turn out to have been a flash in the pan?

One can liken the situation to a large campfire. A cup of gasoline will certainly convert a flamelet into a darting flame. The question is whether that darting flame will lead to a lasting fire and lots of glow. If the campfire is built well; if there are small pieces at the bottom and the larger ones at the top; if the wood is dry; etc. --- the darting flame will likely lead to a full-fledged fire. If, on the other hand, the campfire is poorly built; if there are only few small pieces at the bottom; if the wood is wet; etc. - well, then the darting flame will soon extinguish and the situation will be worse afterwards than before because the darting flame will have burnt whatever there was left of small pieces.

There are many economic examples for both scenarios. The postwar German campfire was very well built and the Marshall Plan, actually a relatively small stimulus, provided the darting flame which turned into a lasting fire. Forty years later, the former East Germany was not a well-built campfire. The West did not throw a cup of gasoline on that campfire. Instead, the West threw (and still throws) truckloads of gasoline on that campfire (roughly 100 BEUR annually) and it still hasn't really developed its own strength.

How can one explain the difference between postwar Germany and the East Germany of the 1990s? Well, it certainly can't have been racial and/or cultural reasons: the East and the West were ethnically the same Germans. The answer must be found elsewhere.

Is the Greek economy today more akin to the postwar Germany of the 1950s or East Germany of the 1990's? One thing is certain: post-1953 Germany was a tremendous economy to invest in, both for Germans as well as foreigners (particularly Americans made huge investments in Germany). Greece, in contrast, ranks as one of the least attractive countries of the Eurozone, of the EU and of Europe in total to invest in (Doing Business Report 2018).

Statistics since 1981 show that as money flows into the Greek economy, as growth occurs, as purchasing power increases --- much of that purchasing power goes into consumption instead of investment. Since the Greek economy cannot satisfy, by far, the desires of Greek consumers, the increased purchasing power goes into imported products. All the reforms discussed/implemented since 2010 had as their declared objective to change/improve the structure of the Greek economy: more productive output and less services; more exports and less imports; more private and less public activity; etc. A distant observer cannot see that much has changed in that regard.

On the other hand, there are some positive examples. My favorite one is Cosco which I have described in many articles since 2012 as the prototype of a desirable foreign investor. Cosco proves a couple of important points to me: (a) there are investment opportunities in Greece which are of great interest to major foreign players; (b) there are major foreign players who are willing to invest even during risky times; (c) there are major foreign players who take a long-term view on Greece instead of eyeing only quick profits; and (d) when such major foreign players who take a long-term view on Greece make their investments, the results for the Greek economy can be miraculous.

Cosco had encountered a lot of criticism/objection in its early years. Reactions to my positive articles about Cosco pointed out inhumane working conditions in Chinese sweat shops. The announcement around 2013/14 that Cosco was projected to add about 1-1/2 - 2% to Greece's GDP by 2018 did not catch much attention. Today, it seems that actual results have persuaded the critics.

So is the Greek economy now akin to a well-built campfire waiting for the initial darting flame or not?

My gut feeling is that there is no major change/improvement in Greece's overall attractiveness as an economy to invest in. The truly important changes/improvement in the structure of the Greek economy have not taken place. At the same time, I believe that there could be new 'Cosco's' and the Greek government should make every effort to look for them and find them. If only there were a dozen 'Cosco's' in the Greek economy, their presence would probably do more to change/improve the structure of the Greek economy than all the Troika's, Task Forces, etc. put together.


  1. A lot of topics, and a lot of questions.
    Would Greece get a lasting Wirtschaftswunder if money was injected?
    Is that Wunder latent and waiting for the money injection?
    And then you state the conditions prevailing, she has a lousy business climate. Therefore, what you really ask is, "can you buy a good business climate"? My answer to that is YES, but it more than eats up your profit. In fact it is what happened during the last 4 decades, everybody from unions to politicians to tax inspectors were peddling good business climate.

  2. Nothing of German origin should ever be a model for Greece. We are talking polar opposites here. Enough with "German ideas" about Greece. This is how "Vavarokratia" (The Bavarian rule period of incompetent Otto) started in Greece and created the clientellist state because the alient ruler could not connect with his subjects. German opinions stay in Germany. Leave Greece alone. You have no clue on how to manage Greece.

  3. Greece does not need any further German BS and unwelcomed BS, I might add.

    All Greece needs is to faithfully execute tons of projects laying around and waiting to be executed:


    1. Πρόσεχες τις παρέες σου, εκεί που πήγες? Πολλούς "Republic of Macedonia"(ΣΚΕΤΟ!)βλέπω ανάμεσα στους συμμετέχοντες!

    2. "...Perhaps the most innovative feature of the London agreement was a clause that said West Germany should only pay for debts out of its trade surplus, and any repayments were limited to 3% of exports earnings every year. This meant those countries that were owed debt had to buy West German exports in order to be paid. It meant West Germany would only pay from genuine earnings, without recourse to new loans. And it meant Germany's creditors had an interest in the country growing and its economy thriving.
      Following the London deal, West Germany experienced an "economic miracle", with the debt problem resolved and years of economic growth. The medicine doled out to heavily indebted countries over the last 30 years could not be more different. Instead, the practice since the early 1980s has been to bail out reckless lenders through giving new loans, while forcing governments to implement austerity and free-market liberalisation to become "more competitive".

      As a result of this, from Latin America and Africa in the 80s and 90s to Greece, Ireland and Spain today, poverty has increased and inequality soared. In Africa in the 80s and 90s, the number of people living in extreme poverty increased by 125 million, while economies shrank. In Greece today, the economy has shrunk by more than 20%, while one in two young people are unemployed. In both cases, debt ballooned.

      The priority of an indebted government today is to repay its debts, whatever the amount of the budget these repayments consume. In contrast to the 3% limit on German debt payments, today the IMF and World Bank regard debt payments of up to 15-25% of export revenues as being "sustainable" for impoverished countries. The Greek government's foreign debt payments are around 30% of exports.

      When debts have been "restructured", they are only a portion of the total debts owed, with only willing creditors participating. In 2012, only Greece's private creditors had debt reduced. Creditors that held British or Swiss law debt were also able to "hold out" against the restructuring, and will doubtless pursue Greece for many years to come.

      The "strategy" in Greece, Ireland, Portugal and Spain today is to put the burden of adjustment solely on the debtor country to make its economy more competitive through mass unemployment and wage cuts. But without creditors like Germany willing to buy more of their exports, this will not happen, bringing pain without end.

      The German debt deal was a key element of recovering from the devastation of the second world war. In Europe today, debt is tearing up the social fabric. Outside Europe, heavily indebted countries are still treated to a package of austerity and "restructuring" measures. Pakistan, the Philippines, El Salvador and Jamaica are all spending between 10 and 20% of export revenues on government foreign debt payments, and this doesn't include debt payments by the private sector.

      If we had no evidence of how to solve a debt crisis equitably, we could perhaps regard the policies of Europe's leaders as misguided. But we have the positive example of Germany 60 years ago, and the devastating example of the Latin American debt crisis 30 years ago. The actions of Europe's leaders are nothing short of criminal..."

    3. The Treaty of Versailles (signed in 1919) and the 1921 London Schedule of Payments required Germany to pay 132 billion gold marks (US$33 billion) in reparations to cover civilian damage caused during the war. This figure was divided into three categories of bonds: A, B, and C. Of these, Germany was required to pay towards 'A' and 'B' bonds totaling 50 billion marks (US$12.5 billion) unconditionally. The payment of the remaining 'C' bonds was interest free and contingent on the Weimar Republic's ability to pay, as was to be assessed by an Allied committee.

    4. London Schedule of Payments

      The London Schedule of Payments of 5 May 1921 established "the full liability of all the Central Powers combined, not just Germany alone," at 132 billion gold marks. This sum was a compromise promoted by Belgium—against higher figures demanded by the French and Italians and the lower figure the British supported—that "represented an assessment of the lowest amount that public opinion ... would tolerate".

      This figure was divided into three series of bonds: "A" and "B" Bonds together had a nominal value of 50 billion gold marks (US$12.5 billion)—less than the sum Germany had previously offered to pay. "C" Bonds, comprising the remainder of the reparation figure, "were deliberately designed to be chimerical." They were "a political bargaining chip" that served the domestic policies of France and the United Kingdom. The figure was completely unreal; its primary function was to mislead public opinion "into believing that the 132-billion-mark figure was being maintained". Furthermore, "Allied experts knew that Germany could not pay 132 billion marks and that the other Central Powers could pay little. Thus, the A and B Bonds, which were genuine, represented the actual Allied assessment of German capacity to pay." Taking into account the sum already paid between 1919 and 1921, Germany's immediate obligation was 41 billion gold marks.

      To pay towards this sum, Germany could pay in kind or in cash. Commodities paid in kind included coal, timber, chemical dyes, pharmaceuticals, livestock, agricultural machines, construction materials, and factory machinery. The gold value of these would be deducted from what Germany was required to pay. Germany's assistance with the restoration of the university library of Louvain, which was destroyed by the Germans on 25 August 1914, was also credited towards the sum, as were some of the territorial changes the treaty imposed upon Germany. The payment schedule required US$250 million within twenty-five days and then US$500 million annually, plus 26 per cent of the value of German exports. The German Government was to issue bonds at five per cent interest and set up a sinking fund of one per cent to support the payment of reparations.

    5. Amount paid by Germany

      The precise figure Germany paid is a matter of dispute. The German Government estimated it had paid the equivalent of 67.8 billion gold marks in reparations. The German figure included—other than gold or goods in kind—the scuttling of the interned German fleet at Scapa Flow, state property lost in lands ceded to other countries, and the loss of colonial territories. The Reparation Commission and the Bank for International Settlements state that 20.598 billion gold marks was paid by Germany in reparations, of which 7.595 billion was paid before the implementation of the London Schedule of Payments. Niall Ferguson provides a slightly lower figure. He estimates that Germany paid no more than 19 billion gold marks. Ferguson further estimates that this sum amounted to 2.4 per cent of Germany's national income between 1919 and 1932. Stephen Schuker, in his definitive econometric study (1988, pp. 106–19), concedes that Germany transferred 16.8 billion marks over the whole period, but points out that this sum was vastly offset by the devaluation of Allied paper-mark deposits up to 1923, and by loans that Germany subsequently repudiated after 1924. The net capital transfer into Germany amounted to 17.75 billion marks, or 2.1% of Germany's entire national income over the period 1919–1931. In effect, therefore, America paid reparations to Germany—four times more, in price-adjusted terms, than the U.S. furnished to West Germany under the post-1948 Marshall Plan. According to Gerhard Weinberg, reparations were paid, towns were rebuilt, orchards replanted, mines reopened and pensions paid. However, the burden of repairs was shifted away from the German economy and onto the damaged economies of the war's victors.

      Loan payments

      To help make reparations payments, Germany took out various loans during the 1920s. In 1933, following the cancellation of reparations, the new German Chancellor Adolf Hitler cancelled all payments. In June 1953, an agreement on this existing debt was reached with West Germany, which agreed to make symbolic token payments against the loans that had been defaulted on in the 1920s, but deferred some of the debt until West and East Germany were unified. In 1995, following reunification, Germany began making the final payments towards the loans. A final installment of US$94 million was made on 3 October 2010, settling German loan debts in regard to reparations.

  4. To show you how confused you are:

    Both of the comments are mine. On one you give me a Perfect 10 and thank you for it because I deserve it :). On the second you make the accusation that I am from FYROM. Why this demonstrable modern Greek trait to exist in a constant state of confusion? Why this propensity to call the white, black and the black, white? I think I know why. Modern Greeks are people with a defeated mentality, unable to do what is right, always eager to follow easy paths mixed with a disturbing ideology of like 2 centuries ago. You are not going to go anywhere with this attitude. Not only you seem to want to transform your problems into someone's else prroblems but you are a victim of foreign influences and unending idiocies as to the true cause of your problems which is YOU. YOU and every other tormented soul who wants to pass as a Greek. You are not true Greeks. Greeks are people of science and reason. You have become so second rate balkan creatures full of emotions and ideological biases which are designed to keep you a perpetual slave. Slaves don't have opinions. Slaves are supposed to zip their mouths and do whatever their owners command.

  5. Καραγιάννη,
    Άσε τα "σάπια" του τύπου: "...δεν αίμαστε πραγματικοί Έλληνες, οι άλλοι εκτός από σένα..." κλπ.

    Για να ξελαμπικάρεις, σου οφείλω δύο απαντήσεις στην ελληνική γλώσσα, την οποία θεωρώ ότι ομιλείς, καθόσον μάλιστα δεν ενδιαφέρουν κανέναν άλλον εδώ μέσα...
    1. Το 10ράκι το πήρες για το σχόλιο που έκανες επί της ανάρτησης.
    2. Την κακή κριτική την πήρες για να προσέχεις στο μέλλον, εκεί στα fora που συμμετέχεις, είτε με δαπάνες του Δημοσίου είτε με δικά σου έξοδα, κάθε φορά που συναγελάζεσαιμε Σκοπιανούς και τους βλέπεις να σηκώνουν στα τραπεζάκια τους ταμπελάκια με τον τίτλο: "Republic of Macedonia", (δηλ. ΣΚΕΤΟ, χωρίς το F.Y.), να αντιδράς και να μην το "καταπίνεις έτσι αμάσητο"!
    Τουλάχιστον ΟΧΙ πριν το αποφασίσει η κυβέρνηση της χώρας, όπου ανήκει ο φορέας τον οποίον εκπροσωπείς στα fora αυτά!
    Γιατί η ενδοτικότητα ορισμένων, έχει δημιουργήσει de facto καταστάσεις, συχνά μειώνοντας την διαπραγματευτική ισχύ του Υπ. Εξ και γενικότερα της χώρας στη νέα κατάσταση και στο νέο Status Quo!
    Αλλοιώς εσύ ΔΕΝ είσαι πραγματικός Έλληνας!

    Υ.Γ. Άλλη φορά να έχεις το θάρρος της γνώμης σου και να υπογράφεις τα σχόλιά σου, χωρίς να επιλέγεις την ανωνυμία!

    1. Αντε χάσου. Ενας τυπικός Έλληνας ηλίθιος που δεν συνεισφέρει τίποτα και πιστεύει ότι ξέρει τα πάντα. Η Τουρκία θα ήταν ένα ωραίο μέρος για να διευρύνετε τους ορίζοντές σας.