February 09, 2015

A Most Ironic Scenario

Patrick Marren
Partner

Some perspective from 93 years ago on Greece threatening not to pay back its monstrous debt to German and other banks.

There IS, in fact, a precedent for unsustainable intergovernmental payment schemes, and that precedent reminds us that "irony" is a Greek word.

From December 19, 1921, the New York Times:

"LONDON ON PROBLEM OF GERMAN DEFAULT
Germany Considered Able to Pay, but the Wish Is to Avoid Coercion.
WHY FOREIGN LOAN FAILED
Belief That Terms Must Be Imposed to Compel Proper Finance Methods by German Government. 

"LONDON, Dec. 18.--As the London financial market sees it, the German position forms the most pressing problem for consideration by the leading powers....

"...Germany's plea of her inability to pay in full the instalments due on reparations account in January and February has brought the crisis to a head a little in advance of the time expected. In the City [of London, financial district] it was not thought that Germany would default on the January payment, as all evidence had pointed to her ability to meet this requisition and also the smaller sum due in February. It is necessary to look at the matter not from the viewpoint of the German government but of the German nation. The German government is known to be poor, but, as financial London holds, its poverty is of its own making. That is to say, Germany has failed to impose adequate taxation and has deliberately dissipated its wealth on subsides and other extravagances. It is suspected, moreover, of having made large purchases of dollars unknown to the Reparations Commission. Throughout the recent widespread discussion of a moratorium for Germany London has never changed its view that Germany can pay and must be made to pay....

"...As to the question of a German loan in London, there has never been any doubt as to Germany's inability to raise such a loan, or even secure extensive credits here. The German government's failure to arrive at any agreement with her own industrialists, who alone could provide the necessary guarantees for such a loan, was sufficient in itself to block the way to a large operation of this kind. The Allies must now make up their minds whether they will proceed to extreme measures of coercion or submit to postponement. There appears to be no real necessity for forgoing the January and February instalments, but if the Allies listen to the views of the best financial experts, they will study very carefully the advisability of granting delay to Germany. In the judgment of such experts, however, that delay will be useless unless accompanied by strict conditions in regard to a complete change in the German Government's system of finance.

"The next move obviously rests with the Allies. It is awaited with deepest interest and anxiety, but in the meantime it seems to London that a sharp blow has been administered to the exchange markets which were lately showing much gratifying powers of recuperation." 

[Wikipedia continues the story...]

By late 1922, the German defaults on payments had grown so serious and regular that a crisis engulfed the Reparations Commission. French and Belgian delegates urged the seizure of the [industrial region of the] Ruhr to encourage the Germans to make more effort to pay, while the British supported postponing payments to facilitate the financial reconstruction of Germany. On 26 December 1922, Germany defaulted on timber deliveries. The timber quota was based upon a German proposal and the default was massive. The Allies were unanimous that the default was in bad faith [my emphasis].

In January 1923, despite quota reductions, the German Government defaulted on coal deliveries for the 34th time in three years following the loss of the Upper Silesian coal fields containing 11 per cent of German coal resources, which had been transferred to Poland. On 9 January 1923, the Reparation Commission declared Germany to be in default of her coal deliveries and voted to occupy the Ruhr to enforce the country's reparation commitments. Britain was the lone dissenting voice to both measures. On 11 January, French and Belgian soldiers—supported by engineers including an Italian contingent—entered the region, initiating the Occupation of the Ruhr.

The occupation proved marginally profitable; the occupying powers received 900 million gold marks, and much of this merely covered the military costs of occupation....

...In October 1923, a committee consisting of American, Belgian, British, French, German, and Italian experts and chaired by the former Director of the US Bureau of the Budget Charles G. Dawes was formed to consider "from a purely technical standpoint" how to balance the German budget, stabilize the economy and set an achievable level of reparations.

...Under the Dawes Plan, Germany always met her obligations. However, they considered the plan a temporary measure and expected a revised plan at a future date.

[five and a half more years of economic upheaval and some starving Germans later...]

...In February 1929, a new committee was formed to re-examine reparations. It was chaired by the American banker Owen D. Young and presented its findings in June 1929. The "Young Plan" was accepted and was ratified by the German Government on 12 March 1930. The plan established a theoretical final reparation figure at 112 billion gold marks (US$26.35 billion), with a new payment schedule that would see reparations completed by 1988—the first time a final date had been set. In addition, foreign oversight of German finances was to end with the withdrawal of the Reparations Agency, which would be replaced by the Bank for International Settlements.

...During 1931, a financial crisis began in Germany. In May, Creditanstalt - the largest bank in Austria - collapsed, sparking a banking crisis in Germany and Austria. In response, Bruning announced that Germany was suspending reparation payments. This resulted in a massive withdrawal of domestic and foreign funds from German banks. By mid-July, all German banks had closed. Until this point, France's policy had been to provide Germany with financial support to help Bruning's Government stabilize the country. Bruning, now under considerable political pressure from the far-right and President Paul von Hindenburg, was unable to make any concessions or reverse policy. As a result, Bruning was unable to borrow money from foreign or domestic sources. Further attempts to enlist British support to end reparations failed; the British said it was a joint issue with France and the United States. In early July, Bruning announced "his intention to seek the outright revision of the Young Plan". In light of the crisis and with the prospect of Germany being unable to repay her debts, United States President Herbert Hoover intervened. In June, Hoover publicly proposed a one-year moratorium to reparation and war debts. By July, the "Hoover Moratorium"; had been accepted.

...During January 1932, [German Chancellor] Bruning said he would seek the complete cancellation of reparations. His position was supported by the British and Italians, and opposed by the French. Because of the political differences between countries on the subject and impending elections in France and Germany, a conference could not be established until June. This delay brought about the downfall of Bruning's Government. On 16 June, the Lausanne Conference opened. However, discussions were complicated by the ongoing World Disarmament Conference. At the latter conference, the US informed the British and French that they would not be allowed to default on their war debts. In turn, they recommended that war debts be tied into German reparation payments, to which the Germans objected. On 9 July, an agreement was reached and signed. The Lausanne Conference annulled the Young Plan and required Germany to pay a final, single installment of 3 billion marks to save France from political humiliation and ending Germany's obligation to pay reparations.

[...Will we see 13 years of denial of the fact that Greece can no more pay back the Germans and its other creditors than Germany could pay back the Allies? I think it is quite possible. Of course Greece does not have the kind of industrial or military power to strike back at those who are squeezing it that Germany possessed in the 1930s. But other impoverished countries have unexpectedly made trouble for us in the recent past. Afghanistan, for one. Another decade of such "reparations," and could Greece be a new, Russian-aligned, strategically and geographically threatening European Afghanistan?]

Thoughts?