LONDON (AP) - Forgiving debt, if done right, can get an economy back on its feet.
LONDON (AP) — Forgiving debt, if done right, can get an economy back on its feet.
Though Germany is resisting Greece's pleas for some relief, it should know better than most what it can achieve.
After the hell of World War II, the Federal Republic of Germany — more commonly known as West Germany — got massive help from its former foes.
Among its creditors then? Greece.
The 1953 agreement, in which Greece and about 20 other countries effectively wrote off a large chunk of Germany's loans and restructured the rest, is a landmark case that shows how effective debt relief can be. It helped spark what became known as the German economic miracle.
So it's perhaps ironic that Germany is now among the countries resisting Greece's requests to have part of its debts written off.
Greek Finance Minister Yanis Varoufakis claims debt relief is the key issue that held up a deal with creditors last week and says he'd rather cut off his arm than sign a deal that does not tackle the country's borrowings.
In a closely-watched report on Thursday, the International Monetary Fund backed the call to make Greece's debt manageable.
Despite years of budget cuts, Greece's debt burden is higher than when its bailout began in 2010 — over 300 billion euros ($332 billion), or 180 percent of annual GDP — because the economy has shrunk by a quarter.
Here's a look at the case when Greece helped Germany and the lessons it might hold for today.
FORGIVE US OUR DEBTS
The 1953 deal, hammered out over months, was generous to West Germany. It cut the amount it owed, extended the repayment schedule and granted low interest rates.
And crucially, it linked West Germany's debt repayment schedule to its ability to pay — tying repayments to the trade surplus it was running and expected to run. That created an incentive for trading partners to buy German goods.
And the deal, called the London Agreement, effectively blocked claims for reparations for the destruction the Nazis inflicted on others.
But it wasn't a one-way street.
"The London Agreement gave Germany sweeping debt forgiveness and protection from creditors, in exchange for pro-market reforms," said Professor Albrecht Ritschl of the London School of Economics.
West Germany was able to borrow on international markets again, and, free of onerous debt payments, saw its economy grow strongly.
Development activists cite that case when arguing for easier terms for troubled countries today, including Greece.
"The same opportunity should be given to Greece that was given to Germany in 1953," said Eric LeCompte, executive director of the debt relief organization Jubilee USA.
Greece has already had some relief. Private sector bondholders lost 53 percent of face value in a 2012 restructuring, and remaining debts have been stretched out.
Now most of Greece's debt is owed to its bailout creditors. While the creditors, notably the International Monetary Fund, have indicated that the debt load should be made more manageable, nothing's really happened.
The German debt forgiveness was driven by the United States, which pressed others to get a deal — British creditors gave up two-thirds of what they were owed.
It wasn't charity. The U.S needed a strong West Germany as an ally against the perceived threat that was the Soviet Union.
Ritschl says the U.S. was also concerned that being too tough on West Germany might repeat the mistakes of the past. After World War I, crippling reparations on Germany helped fuel the rise of Adolf Hitler.
Yale University Professor Timothy Guinnane warns against making too many comparisons, partly because Germany was so much more important in global geopolitics than Greece today.
And Germany was already posting trade surpluses when the agreement was signed. Greece, on the other hand, lacks strong export-oriented industry like Germany's. That's partly why creditors are insisting on reforms to make Greece more competitive.
"The U.S. was basically the last man standing after the war and essentially decided to cut Germany's debt in half," Guinnane said. "It was a hard-nosed decision ..... it's wrong to say it was an act of generosity."
Still, there are echoes from the German case that are relevant to Greece today.
The deal to help Germany was based on a realistic way for the country to pay its debts — Greece's Varoufakis has suggested his country's debt repayments be linked to growth. Over its five years of bailout loans, Greece has had to meet debt commitments even though its economy was in a depression.
Germany's deal also acknowledged that mistakes after World War I in imposing punitive conditions helped boost the political prospects of extremists. In its misery, Greece has seen more votes go to radical parties of the left and right, including neo-Nazi Golden Dawn.
"It's deeply ironic that it's forcing Greece into a position that's prompting the rise of extremist parties," said Guinnane.
One of the reasons why relations between the Greek government and its creditors have deteriorated is the lack of consensus on what to do about Greece's debts. Creditors, especially those that have endured austerity too, want to be repaid.
Still, there are some signs of movement.
Cyprus' finance minister said his own bailed-out country could consider writing off 330 million euros ($370 million) in rescue loans to Greece. The U.S., while not directly involved, has been advocating debt relief.
And the IMF, one of Greece's key creditors, added its voice on Thursday, arguing in a report that the country should get 50 billion euros in new financing through 2018 as well as debt relief. It said Greece had been too slow to make reforms and privatize, but that it now needs help managing its debt.
That, it said, could be done by giving the country longer repayment periods and lower interest rates on its loans.
Like Germany, some 60 years ago.
McHugh reported from Frankfurt, Germany.