6 The Multilateral Principle-Based Approach to the Restructuring of German Debts in 1953 Laura de la Villa 6.1 Introduction Germany was the biggest defaulter of the interwar period. After the First World War, the German Reich accumulated an enormous mass of foreign debts and claims: the war reparations imposed by the Treaty of Versailles and the private loans to German public and private borrowers that had boomed between 1924 and 1930, including the Dawes and the Young bonds.¹ During the 1930s, Germany defaulted on its foreign obligations but continued to accumulate debts through the deficits in clearing accounts imposed by the Nazi regime to its satellites. After the Second World War, Germany continued to accumulate claims from Allied post- war relief programs and, significantly, from Marshall Plan funding. However, in February 1953, twenty-one countries, together with the Federal Republic of Germany,² signed an international treaty, the London Debt Agreement on German Debts (LDA), which settled more than twenty years of default on Germany’s foreign debts. All external debt of Germany, sovereign and private (owed to both official and private creditors) was settled in one unified operation led by the three Allied governments (France, the UK, and the US) following a multilateral principle-based negotiation. The LDA consisted of two separate, but interrelated, deals. Firstly, the Intergovernmental Agreement for the settlement of pre–Second World War German Debts which was negotiated in an international ¹ The German Reich borrowed $200 million through the Dawes Plan Loan issued in 1924 in several markets and currencies as part of a deal to resume reparations payments and help stimulate the German economy. The Dawes bonds had priority claim on Germany’s foreign exchange and were secured by certain revenues. The Dawes Plan soon proved to be both politically and economically untenable. It was replaced in 1930 by the Young Plan, which rescheduled reparations payments and provided for the withdrawal of French troops from German territory. It also included a new inter- national bond issue. The Young Plan Loan raised approximately $300 million, with bonds denomin- ated in nine different currencies. The Young Loan bonds had no priority on foreign exchange transfers; however, all its tranches were indexed to gold at their value on the date of issue. ² For the sake of simplification, I use Germany or West Germany indistinctly to refer to the Federal Republic of Germany (FRG). Laura de la Villa, The Multilateral Principle-Based Approach to the Restructuring of German Debts in 1953 In: Sovereign Debt Diplomacies: Rethinking Sovereign Debt from Colonial Empires to Hegemony. Edited by: Pierre Pénet and Juan Flores Zendejas, Oxford University Press (2021). © Oxford University Press. DOI: 10.1093/oso/9780198866350.003.0007 143 conference with more than 300 participants representing both government and creditors (private and public) from sixty-five countries.³ Secondly, the bilateral agreements that settled the debts arising out of the economic assistance furnished to Germany after the end of the Second World War by the Allied governments. Altogether, both agreements led to a major reduction of German external debt: in total, the LDA dealt with DM29.8 billion of external debt and reduced it to DM14.2 billion. Further significant relief on those debts was granted through significant interest reductions, extension of maturities, and postponement of amortizations. Moreover, article 5(2) of the agreement deferred all claims arising from the Second World War, such as the clearing debts, until a future reunifica- tion: virtually a cancellation, since it was not expected to be soon.⁴ The LDA contributed to Germany’s post–Second World War economic per- formance and development, as it allowed her reintegration into world finance and trade networks and a balanced path to recovery.⁵ Economic historians have rediscovered the experience of the German debt relief provided after the Second World War: the LDA was at the core of the financial reconstruction of Germany and the Marshall Plan (Ritschl, 2012b),⁶ allowing the normalization of West Germany’s international financial relationships (Guinnane, 2015). Some re- revisionist contributions emphasized that the Marshall Plan was a US far-reaching recovery programme based on the integration of Europe in which German reconstruction was central. In this vein, the economic and financial basis of the Marshall Plan in Germany was not just about American transfers in the form of loans and deliveries which promoted exports and helped to eliminate bottlenecks to industry and created announcement effects in output (Borchardt and Buchheim, 1991) but the financial and economic reforms that underpinned its subsequent growth model. Those reforms included, firstly, the currency reform which eased the burden of domestic public and private debts (Lutz, 1949; Buchheim, 1994; Kindleberger & Ostrander, 2003), and secondly, the creation of the European Payments Union (EPU) that allowed the reintegration of Germany in European trade. As a result, Germany, was able once again to specialize in importing raw materials and exporting capital goods, pushing the rest of Europe towards trade liberalization (Bordo, 1993; Eichengreen, 1993). The final reform ³ The original signatory countries were: Belgium, Canada, Ceylon, Denmark, French Republic, Greece, Iran, Ireland, Italy, Liechtenstein, Luxembourg, Norway, Pakistan, Spain, Sweden, Switzerland, the Union of South Africa, the United Kingdom of Great Britain and Northern Ireland, the United States of America, and Yugoslavia. Until 1963, twenty-six more countries signed the agreement. ⁴ Other claims arising out of both world wars were settled during the conference and embedded in parallel agreements, but they are not included in the common statistical summaries of the LDA since they were not strictly part of the agreement (nor pre-war debts). See, for example, Kaiser (2013) and Kampffmeyer (1987). ⁵ For a review of the literature on the impact of the LDA and a quantitative investigation see Galofré-Vilà et al. (2016). ⁶ See the discussion between Ritschl (2011, 2012a) and Sinn (2012) about the scope of the Marshall Plan aid and debt relief. 144 was the LDA that settled and reduced the burden of Germany’s foreign debts. The LDA was key to Germany’s reconstruction because reopening its economic borders required the reactivation of international trade finance. Without the LDA, new credits would have ranked in the bottom of the seniority queue and, therefore, would have been valueless given the debt and claims still in default. The creation of a parallel trade and payment system guaranteed by the dollar allowed for the problems of trade and German debts (Berger & Ritschl, 1995) to be dealt with separately, and once this proved successful, the problem of external debts was settled. However, as I argue in this chapter, the LDA was significant and exceptional not only from the point of view of post–Second World War reconstruction, but also from the perspective of sovereign debt resolution procedures. As I document in this chapter, the concerns of the different actors involved and methods and tactics available to each of them shaped the resolution of German debts from the end of Second World War until 1953. The LDA was not only the result of creditors’ governments diplomatic intervention: the collective pressure of private creditors was also an important contributing force in the discussions. As I argue, this led to the design of a multilateral resolution procedure based on the principles of equity of treatment and ability to pay that settled in one unified and orderly operation the question of German debts that had remained at the core of inter- national economic and political disputes since the end of the First World War. The previous chapter in this volume showed how the American government negotiated bilaterally with the Mexican government during the war, agreeing to a massive debt reduction. The 1953 German debt settlement was also the result of creditor governments’ intervention and the influence of diplomacy in the reso- lution of sovereign debt disputes. Indeed, the LDA appears in the literature mostly as a debt relief operation resulting from the prevailing political considerations of Allied governments after the Second World War. Demands for Germany to service an enormous debt was incompatible with strengthening the German economy and therefore creditor concessions were the price to pay for a higher purpose: maintaining a central political and economic ally in Europe (Guinnane, 2015). Indeed, once the debts entered the diplomatic agenda, the goal of debt recovery was balanced against other national economic interests, a transatlantic cooperation agenda, and global security concerns. In this sense, creditors’ gov- ernments conceived the LDA against the background of several pressing economic and political difficulties. Firstly, the three most important creditors’ governments (the US, the UK, and France) were ruling over most of the policy areas of West Germany under the Occupation Statute and were negotiating with the Federal Republic of Germany the transition to full sovereignty. Secondly, the LDA was conceived as a last step to ensure the self-sustainability of West Germany, in particular, and Europe, in general. Marshall Aid was about to finish and the Americans were determined to avoid the 1920s growth model that was dependent 145 on continued American transfers, since this was highly unstable: