Historical model

In February 1953, the government of the Federal Republic of Germany signed the London agreement on debt relief. Some 70 debtor countries forgave loans, some of which had been granted long before the war. At the time, West German foreign debt amounted to about 30 billion Deutsche marks. After tough negotiations, more than half of that debt was dropped. The agreement helped to fund reconstruction in Germany and ­contributed to the “economic miracle” of the 1950s and 1960s.

According to Kindernothilfe and erlassjahr.de, the German public has forgotten that the Federal Republic was once burdened with massive foreign debt similar to Greece or some African countries today, and that the economic upswing was not just the result of a willingness to work hard. Jürgen Kaiser, the political coordinator of erlassjahr.de, says that debt relief made the difference. In his eyes, the policy was well considered. The USA, he argues, wanted West Germany to become a strong ally in the Cold War. The intergovernmental agreement spelled out, moreover, that debt services depended on German export revenues, thus providing incentives to debtor countries to buy goods from this country. According to Kindernothilfe and erlassjahr.de, the policy implemented 60 years ago should serve as a model today.

Their recently published debt report also points out that there are risks of over-indebtedness in many countries. In view of the euro crisis, many people overlook that Asian, African and Latin American nations are facing difficulties, states Patrick Weltin of erlassjahr.de in his contribution to the report. He assesses relevant risks by using
criteria defined by the International Monetary Fund. Relevant indicators include:

•  the ratio of foreign debt to export revenues (with 25 % or more being a sign of danger),
•  the ratio of foreign-debt servicing (interest rates and repayment) to export revenues (200 % is the critical mark) and
•  the ratio of sovereign debt to gross domestic product (78 %).

The publication assesses 132 developing countries and emerging markets and warns that, for 65 of them, at least one indicator is above the risk threshold. Last year, that was the case for 44 of 117 countries considered. The risks of over-indebtedness have increased, argues Weltin, as the number of countries with more than one indicator above the limit has grown. He emphasises there is continuity, moreover, because countries with worrisome indicators last year still have worrisome indicators now.

Weltin argues that the situation of small island developing states (SIDS) is particularly difficult. They generally depend on exports and tourism because they need foreign exchange to import many goods they cannot produce domestically. These countries are exposed to price volatility on world markets and feel the impact of the eco­nomic downturn in the rich world.

According to Weltin, the debt situation of many fragile states – including Pakistan, Sudan and Zimbabwe – is cause for similar concern. The same is true of least developed countries (LDCs), most of which are African. Weltin writes that the European financial crisis is hurting them, because the EU is African LDCs’ most important trading partner.

The role of China, India, Brazil and other so-called new donors is assessed as ambiguous in the debt report. On the one hand, these countries’ strong commodity demand and financing offers have shielded poor countries from the global financial crisis. On the other hand, new donors neither report the loans they give to international agencies nor do they apply international credit rules, so their financing policies may actually exacerbate debt risks in the developing world.