Ireland Proposes Debt Restructuring Conference for Spain, Greece, Ireland; A Turnip is a Turnip

Contagion? Well don't worry about that! German Chancellor Angela Merkel assures us that will not happen. However, a difference of opinion is forming in Greece, Spain, and Ireland.

Via translation from El Confidencial, SYRIZA Extends the Debate, "Ireland Stands Out: Seeks Conference to Restructure Debt, Including Spain."

The Greek elections this Sunday still shaking European foreign ministries. ...

The restructuring of the debt (about 319 billion euros in the case of Greece) scares the markets for contagion effect.

Christine Lagarde was quick to respond in the pages of the Irish Times during a visit to Dublin last Monday. "In principle, collective efforts are welcome, but at the same time a debt is a debt" she said.

Why Ireland Should Support Greek Plan

The above article was based on an Irish Times column Why Ireland Should Support Greek Plan to Write Down Eurozone Public Debt.

Contrary to many reports, Syriza is not threatening a unilateral default but wants Greece’s debt burden to be considered within a broader restructuring of sovereign debt in the euro zone. Its leader, Alexis Tsipras, has called for a “European Debt Conference”, based on the 1953 London Conference that wrote off half of post-war Germany’s debt and extended the repayment period for the rest over a number of decades. As Hans-Werner Sinn, one of Germany’s leading economists and president of the Ifo Institute for Economic Research, acknowledged recently, the 1953 conference was, along with the Marshall Plan, a key factor in enabling Germany’s post-war economic miracle.

The conference met from February 28th to August 28th, 1952, with the final agreement signed the following year and involved representatives from 20 creditor nations (including Greece, Portugal and Ireland) as well as Germany and the Bank for International Settlements. The United States, Britain and France took the lead, making clear from the outset that one of the aims of the conference was to strengthen the German economy.

The preamble to the agreement said it should help to “remove obstacles to normal economic relations between the Federal Republic of Germany and other countries and thereby to make a contribution to the development of a prosperous community of nations”.

Demanding that Germany pay all its debts was seen as incompatible with that aim and with hopes of rebuilding the country’s democracy and anchoring it in the West. The creditor countries acknowledged that the burden of repayments should not be so high as to endanger the welfare of the German people and explicitly spared Germany from any “structural adjustment” policy such as budget cuts or tax increases to fund debt repayments.

The final deal wrote off more than half of Germany’s debts, stretched out repayments on the remainder for 30 years and agreed that, from 1953 to 1958, Germany would only make interest payments. Finally, it was agreed that repayments in any given year should not exceed 5 per cent of Germany’s trade surplus. The agreement was a success – Germany paid off its remaining debts on time and with great ease and its economy rebounded to become the strongest in Europe.

Greece is not Germany and post-war Germany’s debt amounted to a much smaller proportion of its gross domestic product than Greece’s does today. Germany was, however, regarded internationally as a deadbeat debtor, having welched on various debt repayment deals between the two world wars. And the creditor nations’ forbearance in 1953 is all the more remarkable given how recently Germany had led Europe into a catastrophic war that also plunged its antagonists into debt.

Simple Math

I saw Lagarde's nonsensical "A Debt is a Debt" speech in numerous places last week. I nearly responded "A turnip is a turnip and gold is gold, but neither turnips nor gold can default."

And that is the essence of the debate isn't it?

Whether Germany agrees to restructuring or not, what cannot be paid back, won't. Germany either agrees to debt restructuring or Greece will default. Either way, Germany will pay a price.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.