Financial Vergangenheitsbewaeltigung: The 1953 London Debt Agreement

Abstract:     
The 1953 London Debt Agreement settled Germany's debts from the period between the two world wars, and allowed the country to re-establish its role in international capital markets. The Agreement wrote-down the overall debt by about 50 percent and gave the debtors a much longer period to repay. One interesting clause in the Agreement allowed Germany to postpone some payments until such time as re-unification. The Agreement reflects a subtle and responsible understanding of the problems associated with the reparations and debt crises of the 1920s and 1930s, as well as fears about the moral hazard problems that would arise with making any part of the Agreement contingent on events Germany could influence. Recent advocates of third-world debt relief have held up the London Debt Agreement of 1953 as a precedent for debt relief for poor countries today. That argument reflects a misunderstanding of the historical circumstances of the early 1950s, as well as the economic principles reflected in the Agreement.

Number of Pages in PDF File: 48

Keywords: Germany, London Debt Agreement, sovereign debt, debt overhang, HIPC initiative

JEL Classification: N24, F34

working papers series