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Time Flies

posted by Anna Gelpern

To keep this debt thing in perspective ... Germany is about to pay the last of the debt it took on to finance World War I reparations.  This debt is mostly interest payments to private bondholders.  The reparations came out of the Treaty of Versailles in 1919, but Germany had no money, so it issued bonds in the private capital markets in the 1920s to fund its payments to the Allies.  The bonds defaulted in the 1930s (first crash, then Hitler, then it got really messy), but resumed principal payments under a 1953 agreement.  Interest payments were deferred until reunification, and resumed once the Berlin Wall fell, with the last one due this weekend.  Der Spiegel story here.  How poignant yet deeply screwed up all around. 

A separate but related story unfolds here on a bit of loopy U.S. litigation over German bonds reprofiled under the 1953 agreement.  FT Alphaville spins out extreme scenarios here.  Note this is somewhat unusual--in most modern-day sovereign debt litigation, enforceability is not an issue; the battles are over debt collection and asset immunity.  Here the court ruled against Germany on immunity from suit, but specifically withheld judgment on debt enforceability.  By the way, some folks claim that the debt was used to finance infrastructure still used by the Germans.  Some seriously sturdy infrastructure it must be. 


Given the age of some of the railroad infrastructure in New York City -- parts date from the second Wilson administration -- it might not be implausible. Of course, infrastructure in Germany underwent a special form of wear and tear courtesy of the US and British air forces.

Were the bonds prepayable? If so, and if it's taken around 90 years to pay them off, what does that say about the size of the reparations?

Ha ha ha, even though it took so long to pay off the bonds. Hopefully we don't have to wait so many years to see the level of the debt that the Americans have incurred go down. Just recently in the news Ireland is looking to bail out the largest national bank in that country, who knows what kind of repercussion it will have on the rest of the world, and what does that it mean for our financial market.

It was the bombing that struck me with the infrastructure claim, though of course anything is technically possible. I have not studied the terms of the bonds, and would love to hear from anyone who has. My sense is that it is awfully hard to disentangle all the g2g and market borrowing and restructuring that happened over the decades. Every successive arrangement is probably more a function of the political and fiscal circumstances of the day than the terms of the original borrowing.

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