Euro Debt Crisis: The London Debt Conference Revisited

[Excerpted with permission from the January 12th, 2015 European Strategic Alert]

Both the Greek Syriza party and the Independent Greeks have been making headlines in the European media calling for a European-wide debt conference similar to the conference that led to the London Debt Agreement of 1953 that settled the foreign debts of Germany.

In an interview with BBC4 recently, the leader of Syriza, Alexis Tsipras, said,

Convening such a conference is an excellent opportunity not only to settle the Greek debt crisis but to reorganize and reform the entire European financial system. The real issue is not the Greek debt but the bankruptcy reorganization of the entire Eurozone, and more broadly, the trans-Atlantic financial system.

The London Debt Conference … settled the German inter-war public and private foreign debt, as well as the post-war Marshall Plan concessionary loans debt, on the following principles:

• The purpose of the negotiation was to … facilitate the most rapid recovery and expansion of the German economy, which was seen as crucial for the recovery of Western Europe as a whole.

• All the foreign debt, public and private debt was to be settled by treaty…. There were no exceptions, such as hedge funds or vulture funds receiving any special treatment. The agreement was in the form of a treaty between the respective states and therefore final, and not subject to foreign court actions such as in the Argentine case.

• An average 50% cut in the principal of the debt, with low interest rate. Payments were made through [Germany’s] surplus export earnings. That is to say, if Germany enjoyed a surplus of trade, and hence foreign exchange, payments would be made based on that surplus. If there was a deficit, no payments would be made. Part of this formula [stipulated that] Germany was encouraged to implement a policy of import substitution.

• Absolutely no conditionalities were attached….

Most importantly, this occurred under a financial system that was on a Glass-Steagall standard of full separation between commercial and investment banking, where the former was forbidden by law to engage in the trading of derivatives and other forms of exotic financial instruments. At the same time, powerful credit institutions existed, most notably the Kreditanstalt fur Wiederaufbau, which served as Hamiltonian credit institutions to finance industry and infrastructure which rapidly led full employment….

There has never been such a debt restructuring since, and none that has been as successful as the so-called German economic miracle made so manifest.

Such a restructuring could never be done under the current system, primarily because the debt is part of a system of casino banking where these so-called sovereign bonds are linked to a labyrinth of derivatives and speculative securities. Therefore, the entire system of European banking and credit has to be reorganized in an orderly manner as was done under Franklin Roosevelt when the Glass-Steagall Act was passed, beginning with the separation of banks, and the creation of a national credit institutions in the form of the Reconstruction Finance Corporations. This kind of action, with all EU nations at a conference table, makes it possible for Europe as a whole to craft a productive solution for the debt crises of Greece, Ireland, Portugal, Cyprus etc….

The most efficient way to carry out this task would be through returning powers to the sovereign states. With a return to national banking, the European Central Bank could be replaced by a European Development Bank to extend credits to the necessary infrastructure and industrial projects that would integrate Europe into the world land-bridge perspective of the BRICS.