By Klaus Kastner

Germany's debt forgiveness back in 1953 is now being universally cited as the proper precedent to justify a haircut for Greece. I think that this is an extremely poor example. To me, Germany of 1953 is a classic example of a mistaken haircut.

Assume the amount of debt which was forgiven in 1953 had, instead, been converted into a 50-year bond with an interest rate adjustable to something (perhaps GDP; perhaps government revenues; etc.) and a 20-year interest capitalization period. No cash outflow would have burdened the German economic miracle during the next 20 years. At the same time, the German economic miracle would have put Germany in a position to pay all debts which it had assumed. The classic example of making a borrower strong enough so that he can pay his debts.

By 1973, Germany would have easily been in a position to pay annual interest on the bond. And by 2003, Germany would have easily been able to repay or refinance that bond.

And the moral of the story is? Well, if you want to get money back from a poor borrower, the first priority must be to make the borrower strong again. If you only forgive his debt, he may have less debt but he remains poor.

This post was first published by Klaus Kastner in his blog Observing Greece and is republished here with his permission.