The 1953 London Debt Agreement on Germany’s debt
by Eric Toussaint
Germany benefited from the cancellation of most of its debt as of February 27, 1953. This cancellation was instrumental in helping the country regain its position as the leading economic power on the European continent. Since then, no other country has received such favourable treatment. It is very important to know the why and how of this debt cancellation. In a nutshell, the great creditor bloc of West Germany wanted to give the German economy a real boost and make it a stable and central element in the struggle between the Atlantic and Eastern blocs.
Germany benefited from the cancellation of most of its debt as of February 27, 1953 (...) no other country has received such a favourable treatment
A comparison between the treatment of post-war West Germany and that of the developing countries reveals the double standards systematically applied by the great powers.
It should be kept in mind that Nazi Germany had suspended repayment of its external debt beginning in 1933 and never resumed repayment. Yet that was no obstacle to the Hitler regime receiving financial support from and doing business with major private corporations in the United States: Ford, who financed the launch of Volkswagen (the “People’s Car” created by the regime); General Motors, who owned Opel; and IBM, accused of providing, through a fully-managed subsidiary, technology that was used in managing the Nazis’ persecution and extermination of targeted populations before and during World War II.[See Oliver Burkeman, “IBM ‘dealt directly with Holocaust organisers’” .
The amounts of the debt cancelled did not take into account whether a debt was related to Nazi Germany’s aggression and destruction during World War II or the reparations to which countries who were the victims of that aggression were entitled. The war debts were simply set aside, which amounted to an enormous gift to West Germany.
A comparison between the treatment of post-war West Germany and that of the developing countries reveals the double standards systematically applied by the great powers
Despite the fact that they had played a major role in supporting the Nazi regime and were accomplices in the genocide of the Jewish and Roma people, big German corporations such as AEG, Siemens, IG Farben (AGFA, BASF, Bayer and Hoechst), Krupp, Volkswagen, BMW, Opel and Mercedes Benz, and also major financial firms such as Deutsche Bank, Commerzbank and the insurer Allianz were protected and strengthened. The power of Germany’s big capital emerged intact from World War II thanks to the support of the governments of the major Western powers.
In short, West Germany was able to redeem its debt and rebuild its economy so soon after World War II thanks to the political will of its creditors, i.e. the United States and its main Western allies (the United Kingdom and France). In October 1950 the three countries drafted a project in which the German federal government acknowledged debts incurred before and during the war. They added a declaration to the effect that:
The three Governments are agreed that the plan should provide for the orderly settlement of the claims against Germany, the total effect of which should not dislocate the German economy through undesirable effects on the internal financial situation, nor unduly drain existing or potential German foreign exchange resources. (...) The three Governments feel certain that the Federal Government shares their view as to the desirability of restoring Germany’s credit and of providing for an orderly settlement of German debts which will ensure fair treatment to all concerned, taking full account of Germany’s economic problems .
West Germany was able to redeem its debt and rebuild its economy so soon after World War II thanks to the political will of its creditors
Germany’s prewar debt amounted to DM 22.6 billion including interest. Its postwar debt was estimated at DM 16.2 billion. In the agreement signed in London on 27 February 1953  these sums were reduced to DM 7.5 and 7 billion respectively.  This amounts to a 62.6% reduction.
The agreement set up the possibility of suspending payments and renegotiating conditions in the event of a substantial change limiting the availability of resources. 
To make sure that the West German economy was effectively doing well and represented a stable key element in the Atlantic bloc against the Eastern bloc, Allied creditors granted the indebted German authorities and companies major concessions that far exceeded debt relief. The starting point was that Germany had to be able to pay everything back while maintaining a high level of growth and improving the living standards of its population. They had to pay back without getting poorer. To achieve this, creditors agreed, firstly, that Germany could repay its debt in its national currency; secondly, that Germany could reduce importations (manufacturing at home those goods that were formerly imported);  and thirdly, that it could sell its manufactured goods abroad so as to achieve a positive trade balance. These various concessions were set down during meetings held in London in July 1951:
Germany’s capacity to pay involves not only the ability of private and governmental debtors to raise the necessary Deutschemark without inflationary consequences but also the ability of the country’s economy to cover foreign debt service in its balance of payments on current account; [...]
The analysis of Germany’s capacity to pay calls for the study of a number of difficult problems among which are:
(a) the future productive capacity of Germany, with particular emphasis on the capacity to produce goods for export and to replace goods now imported;
(b) the opportunities for the sale of German goods abroad;
(c) the probable future terms of trade of Germany;
(d) the internal fiscal and economic policies required to ensure an export surplus [...]” 
To make sure that the West German economy was effectively doing well and represented a stable key element in the Atlantic bloc against the Eastern bloc, Allied creditors granted the indebted German authorities and companies major concessions that far exceeded debt relief
Another significant aspect was that the debt service depended on how much the German economy could afford to pay, taking the country’s reconstruction and the export revenues into account. The debt service/export revenue ratio was not to exceed 5%. This meant that West Germany was not to use more than one twentieth of its export revenues to repay its debt. In fact, it never used more than 4.2% (except once in 1959).
Another exceptional measure was that interest rates were substantially reduced (to between 0 and 5%).
Finally, we have to consider the dollars the United States gave to West Germany: USD 1,173.7 million as part of the Marshall Plan from 3 April 1948 to 30 June 1952 (see the table in the Marshall Plan section above) with at least USD 200 million added from 1954 to 1961, mainly via USAID.
Thanks to such exceptional conditions Germany had redeemed its debt by 1960. In record time. It even anticipated on maturity dates.
Some elements towards a comparison
Thanks to such exceptional conditions Germany had redeemed its debt by 1960. In record time. It even anticipated on maturity dates
It is enlightening to compare the way postwar West Germany was treated with the way developing countries are treated today. Although bruised by war, Germany was economically stronger than most developing countries. Yet it received in 1953 what is currently denied to developing countries.
Proportion of export revenues devoted to paying back the debt
Germany was allowed to limit the share of its export revenues devoted to repaying its debt to 5%. In actual fact, Germany never devoted more than 4.2% of its export revenue to debt repayment (that percentage was reached in 1959).
And in any case, since a large portion of Germany’s debt was repaid in German marks, the German central bank could simply issue currency – in other words, monetize the debt.
In 2019, according to data supplied by the World Bank , developing countries were forced to devote an average of 15.41% of their revenue from export to repayment of external debt (14.1% for the countries of Sub-Saharan Africa; 26.84% for Latin America and the Caribbean; 11.02% for the countries of East Asia and the Pacific; 22.3% for the European and Central Asian countries; 13.27% for North Africa and the Middle East; and 11.16% for the countries of Southern Asia).
Germany was allowed to limit the share of its export revenues devoted to repaying its debt to 5%. In 2019, DCs had to spend an average of 15.41% of their export earnings
Here are a few examples of specific countries, including developing ones and economies of Europe’s periphery: in 2019, the percentage of income from exports devoted to debt service was 26.79% for Angola, 53.13% for Brazil, 11.01% for Bosnia, 12.85% for Bulgaria, 32.32% for Colombia, 12.35% for Côte d’Ivoire, 28.94% for Ethiopia, 26.06% for Guatemala, 39.42% Indonesia, 88.21% for Lebanon, 12.33% for Mexico, 19.95% for Nicaragua, 35.35% for Pakistan, 11.45% for Peru, 27.19% for Serbia, 15.74% for Tunisia, 34.29% for Turkey.
Interest rates on external debt
As stipulated in the 1953 London Agreement on German External Debts, the interest rate was between 0 and 5%.
By contrast, the interest rates paid by developing countries are much higher. And the great majority of agreements set rates that are upwardly variable.
From 1980 to 2000 the average interest rate for developing countries fluctuated between 4.8 and 9.1% (between 5.7 and 11.4% for Latin America and the Caribbean, and even between 6.6 and 11.9% for Brazil from 1980 to 2004).
In 2019, for example, the average interest rate was 7.08% for Angola, 7.11% for Ecuador, 7.8% for Jamaica, 9.76% for Argentina and 11.15% for Lebanon.
Currency in which the external debt had to be paid
Germany was allowed to use its national currency.
No country of the South is allowed to do the same, except in exceptional cases for ludicrously small sums. All major indebted countries must use hard currencies (dollars, euros, yen, Swiss francs, pounds sterling).
In the case of Germany, the agreement set up the possibility of suspending payments and renegotiating conditions in the event that a substantial change should curtail available resources.
Creditors see to it that loan agreements with developing countries do not include such a review clause, despite the fact that a recent judgment of the Court of Justice of the European Union confirms that a State may modify its debt obligations in response to exceptional circumstances. 
Jurisdiction over disputes
The German courts were allowed to refuse to execute rulings of foreign courts or arbitration bodies concerning repayment of external debt if their execution might threaten public order.
The German courts were allowed to refuse to execute rulings of foreign courts or arbitration bodies concerning repayment of external debt if their execution might threaten public order. No such allowance is made by creditors for developing countries
No such allowance is made by creditors for developing countries. It must be said that debtor countries are wrong to surrender their own jurisdictions when there is this example of Germany’s courts being allowed to have the final word.
Import substitution policy
The agreement on Germany’s debt explicitly grants the country the right to manufacture commodities that it once imported.
By contrast, the World Bank and the IMF generally recommend that developing countries not manufacture anything they can import.
Cash grants in hard currency
Although it was largely responsible for World War II, Germany received significant grants in hard currency as part of the Marshall Plan and beyond.
While the rich countries have promised developing countries assistance and cooperation, the latter merely receive a trickle by way of currency grants. Between 2000 and 2018, developing countries repaid an annual average of USD 214 billion – much more than the USD 100 billion they had received in the form of “aid” and “cooperation.” The largest indebted countries in the Third World receive no cash aid whatsoever.
Unquestionably, the refusal to grant indebted developing countries the same kind of concessions as were granted to Germany indicates that creditors do not really want these countries to get rid of their debts. Creditors consider it in their better interest to maintain developing countries in a permanent state of indebtedness so as to extract maximum revenues in the form of debt reimbursement, but also to enforce policies that serve their interests and to make sure that these countries remain loyal partners within the international institutions.
What the United States did via the Marshall Plan for industrialized countries that had been ravaged by war they also did during the postwar period for certain Allied developing countries at strategic locations on the peripheries of the Soviet Union and China. They gave them much greater amounts than those lent by the World Bank to the rest of the developing countries. This particularly applies to South Korea and Taiwan, which were to receive significant aid beginning in the 1950s – aid that largely contributed to their economic success.
From 1954 to 1961, for example, South Korea received more from the United States than the total amount of the loans the World Bank granted to all the independent countries in the Third World
From 1954 to 1961, for example, South Korea received more from the United States than the total amount of the loans the World Bank granted to all the independent countries in the Third World (India, Pakistan, Mexico, Brazil and Nigeria included) – over USD 2.5 billion vs. 2.3 billion. During the same period Taiwan received about USD 800 million.  Because it was strategically located in relation to China and the USSR, a small farming country like South Korea with a population of less than 20 million benefited from US largesse. The World Bank and the United States were tolerant of economic policies in Korea and Taiwan that they banned in Brazil or Mexico.
Let us not delude ourselves, the reasons for which the Western powers treated West Germany as they did after WWII are in no way relevant to the case of other indebted countries.
In order to maintain their domination of indebted countries, or at least the ability to impose policies in line with creditors’ interests, the major powers and the international financial institutions have no intention of cancelling their debts and enabling true economic development.
The only realistic way of resolving the ongoing tragedy of debt and austerity would be for powerful social mobilization in indebted countries to give their governments the courage to confront their creditors by imposing unilateral debt cancellation. Carrying out citizens’ debt audits plays a decisive role in this battle.
Translation by Vicki Briault Manus and Christine Pagnoulle for the CADTM
 (The Guardian, 29 March 2002) (theguardian.com/world/2002/
 Foreign Relations of the United States, 1950, Central and Eastern Europe; The Soviet Union, Volume IV, William Z. Slany, Charles S. Sampson, Rogers P. Churchill, eds. (Washington: US Government Printing Office, 1980), Document 410-762A.00/3–151, “The Chairman, of the Allied High Commission for Germany (Kirkpatrick) to the Chancellor of the Federal Republic of Germany (Adenauer)” (history.state.gov/
 Agreement on German External Debts of 27 February 1953 [with Annexes and Subsidiary Agreements] London, February 27, 1953 (London: Her Majesty’s Stationery Office, 1959), (assets.publishing.service.
 1 USD was worth 4.2 DM at the time. West Germany’s debt after reduction (i.e. DM 14.5 bn) was thus equal to USD 3.45 bn.
 Creditors systematically refuse to include this kind of clause in agreements with developing countries.
 In allowing Germany to replace imports by home-manufactured goods, creditors agreed to reduce their own exports to the country. As it happened, for the years 1950–1951, 41% of German imports came from Britain, France and the United States. If we add the share of imports coming from other creditor countries that participated in the conference (Belgium, Netherlands, Sweden and Switzerland) the total amount reached 66%.
 “Preliminary Consultations on German Debts – London, July 1951” in Deutsche Auslandsschulden; Dokumente zu den internationalen Verhandlungen Oktober 1950 bis Juli 1951; englisches Sonderheft (Hameln: C.W. Niemeyer, 1952), pp. 64–65.
 Based on World Bank, International Debt Statistics online data, accessed on 20/12/2021. Available at https://databank.worldbank.
 Court of Justice of the European Union, Judgment of the General Court (Third Chamber) of 23 May 2019 (curia.europa.eu/juris/
 Calculations by the author based on: 1) World Bank Annual Reports 1954–1961, 2) US Overseas Loans and Grants (Greenbook) (catalog.data.gov/dataset/u-s-