Germany’s debt cancellation: The London debt accords

On 27 February 1953, an agreement was signed in London which resulted in the cancellation of 50 per cent of the debt owed by Germany (represented by West Germany); 15 billion Deutschmarks out of a total debt of 30 billion.[i] Those cancelling debt included the US, UK and France, along with current debtor countries such as Sri Lanka, Pakistan, and private individuals and companies. In the years following 1953 other countries signed-up to cancel German debts, including Egypt, Argentina, Belgian Congo (today the Democratic Republic of Congo), Cambodia, Cameroon, New Guinea, and the Federation of Rhodesia and Nyasaland (today Malawi, Zambia and Zimbabwe).

The German debt came from two periods; before and after the second world war. Roughly half of it was from loans Germany had taken out in the 1920s and early 1930s, before the Nazi’s came to power, which were used to meet payments agreed at the Treaty of Versailles in 1919. They were a legacy of the huge reparations forced on the country after defeat in World War One. The other half of the loans were from reconstruction following the end of the Second World War.

By 1952, Germany’s external debt was around 25% of national income, much lower than external debt’s of government’s today such as Ghana (40%), Sri Lanka (50%) and Zambia (75%).

West Germany had to undertake huge reconstruction following the war, and foreign currency with which to pay foreign-owed debts was scarce. The German delegation convincingly argued its debt payments would rise sharply in the near future which would significantly hinder reconstruction.

Following the debt cancellation, Germany experienced an ‘economic miracle’ with large scale reconstruction, and high rates of growth in income and exports. This stability contributed to peace and prosperity in western Europe.

Creditors to Germany were keen to stabilise the country’s politics and economics because of the Cold War. This unique political reasoning led to creditors adopting a much more enlightened approach to dealing with a country’s debt, which has unfortunately not been repeated in debt crises of the last forty years.

Today, 54 countries are in debt crisis, with external debt payments helping to prevent the provision of decent public services and the meeting of basic public needs. For lower income countries, debt payments have more than doubled in the last decade and are at their highest level since 2001.

Large debt payments also hold back economies and prevent crucial investments. Just as Germany did in the 1950s, governments in Africa, Asia and Latin America need scarce foreign currency to recover from the pandemic, cope with high energy and food prices, adapt to the impacts of climate change and transition to a clean energy future.

Many countries today need debt cancellation, including some which took part in Germany’s debt cancellation in 1953. As well as the scale of debt cancellation, there were many other features which were of great benefit to how the debt cancellation for Germany worked, and the principles of which could be applied to debtor countries today. These include involving all creditors, limiting payments to ability to pay and providing a forum for negotiations if there are further problems down the line.

All types of creditor were brought into the German debt cancellation, whether foreign governments or companies. This ensured equal treatment for all, whilst preventing Germany being pursued by companies for double the amount of debt it was paying to others.

Today, the failure to make private lenders take part in debt relief is a major barrier to getting debt cancellation for countries in crisis. At the start of the Covid pandemic, the G20 agreed a scheme to suspend debt payments for up-to 73 countries. But because private lenders were not made to take part, for countries which applied to the scheme, they had less than a quarter of their external debt payments suspended.

The G20 then created a debt relief scheme, which has so far cancelled no debt. One of the reasons is again because private lenders have not been made to take part in debt relief. In Chad, the private company Glencore delayed negotiations to ensure it still got paid in full. In Zambia, private lenders such as BlackRock have refused to agree to the scale of debt cancellation needed.

The UK can play a key role in compelling private lenders to take part in debt relief. 90% of bonds – the main form of private debt – of countries eligible for the G20 debt relief scheme are governed by English law. This means the UK could introduce legislation to require private lenders to abide by the terms of international debt relief agreements.

This has happened before. In the 2000s there was a debt relief scheme for 40 heavily indebted lower income countries. The debts cancelled were initially those owed to multilateral lenders and other governments. However, in 2010 Debt Justice managed to get an Act of Parliament passed which prevented private lenders demanding more than if they’d taken part in the debt relief scheme.

Of the debt that remained following the German debt cancellation, it was agreed that West Germany’s debt payments could only come out of trade surpluses. If the country had a trade deficit, no payments would need to be made. This meant that Germany only made debt payments using revenue it had actually earned, rather than having to resort to new borrowing or using up foreign currency reserves. It prevented a return to crisis or long stagnation. If it did have a trade deficit, West Germany was also allowed to restrict imports.


For creditor countries it meant that if they wanted to be repaid, they had to buy West German exports. This meant allowing their currencies to rise against the Deutschemark, and allow the Deutschemark to be undervalued in order to enable the debt to be paid. This effectively meant that creditors had to restructure their economies as well – by importing (ie, consuming more) rather than forcing the debtor to implement austerity.


West Germany did indeed have trade surpluses throughout the period of debt payment, and so the clause never needed to be invoked. But its presence helped rebuild the West Germany economy and export base by giving an incentive for creditors to buy West German exports, and allow the Deutschmark to devalue against their currencies.


However, German competitiveness and under-valuation of the Deutschmark continued following the period of debt repayment, and was ‘locked-in’ with other Eurozone countries with the creation of the Euro. Whilst in the 1950s and 1960s West Germany’s trade surpluses enabled the debt to be paid, in more recent decades, they have contributed to increased debt in other countries, most notably countries such as Greece, Ireland, Spain, Portugal in the run-up to the Eurozone crisis in the 2010s.


Germany remains a large trade surplus country – others include Japan, Saudi Arabia, Canada, the Benelux countries, Canada and China.

Given the debt cancellation, and reduction of interest rates, West Germany’s relative debt payments were 2.9% of exports in 1958, the first year for repayments, and then fell as exports grew. In contrast, today the IMF and World Bank regard debt payments of up to 15-25% of export revenues as being ‘sustainable’ for the most impoverished countries.

Pakistan’s external debt payments are 29% of exports, Jamaica’s are 25%. Ghana’s were 21% before they defaulted on many payments at the end of 2022.

If West Germany did not, or was unable, to meet debt repayments, the agreement said there would be consultations between the debtor and creditors, whilst seeking the advice of an appropriate international organisation. This is in marked contrast to debt ‘negotiations’ over recent years where creditor governments and institutions, such as the G20, Paris Club and IMF have dictated terms to debtor countries, and forced them to implement austerity and free market economic conditions. In the event, West Germany did not have further problems with the debt, so again the clause never had to be invoked.

Trade surpluses, deficits and debt

If a country is exporting more than it is importing, it has a trade surplus. This means it has left over revenue which is not spent on any imports. It either has to be spent on paying debts, or has to be lent to other countries, creating debt for them.

If a country has a trade deficit, it is importing more than it is exporting. To be able to do this it either has to borrow money from other countries, or sell assets it owns to other countries.

Debts between countries are therefore caused by (or cause) trade deficits and surpluses.

If one country wants to have a surplus, it relies on another country having a deficit. The more countries are in balance with each other, the more stable the world economy is.

In order for debts to be repaid, debtor countries need to have trade surpluses, and countries which are owed money need to have trade deficits.

It is very difficult for debtor countries to move to having a trade surplus, if creditors are not willing to also move to having deficits.

It is not theoretically possible for all countries to have surpluses, short of the Earth trading with another planet.

[i] This, and most of the information in this briefing on the German debt cancellation deal come from: Kaiser, J. (2003). Debts are not destiny! On the fiftieth anniversary of the London Debt Agreement. Erlassjahr.de (Jubilee Germany). And two other Erlassjahr.de documents ‘Double standards applied’ and ‘Q&A about the London Debt Accord for Germany 1953’

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