When the world marked the 50th anniversary of the London Agreement, which dealt with the debts of the then West Germany, Western leaders and the major international bankers hung their heads in unmitigated shame.

For if the terms of that agreement had been applied to today's indebted countries, we could have avoided the deaths, sufferings and humiliations of hundreds of millions of people.

The London Agreement dealt not only with the debts of the defeated enemy of World War II, but of an enemy that in the annals of world history stands out as having been particularly evil. Germany, of course, was not only the enemy in World War II, but the defeated enemy in World War I, too. It had not repaid the debts incurred on the money borrowed to pay the reparations arising from the previous war. The London Agreement therefore dealt, additionally, with Germany's outstanding World War I debts.

In other words, the creditors and the creditor governments that met in London in 1953 did so to consider the debts of a country perceived to have been responsible for two world wars and the deaths of countless millions, along with the repeated destruction of huge parts of Europe and elsewhere. No less relevant, when viewed against Third World debt, the German people were seen as having been overwhelmingly enthusiastic supporters of their government's war efforts during most of both world wars.

The contrast between the guilt behind the German debts and the innocence of most of the Third World debt could therefore not be greater.

The origin of much of the Third World debt lies in the recklessness of Western bankers who, in the early 1970s, deliberately unloaded surplus capital on the Third World in the form of loans. What is more, much of these aggressively marketed loans were “odious” in terms of international law and therefore not covered by the obligations of sovereign debt. The Doctrine of Odious Debt removes any duty to repay the debt if the loan was contracted by dictatorships primarily for the benefit of the dictatorships and the creditors were aware of the nature of the regime to which they were lending.

It is clear that most people suffering from Third World debts today have had nothing to do with either creditor recklessness or the odious debts contracted by their unpopular rulers.

Notwithstanding their innocence, the First World has insisted on its full pound of flesh. Full debt repayment has been required regardless of all other considerations, including even the right to life itself. An exceedingly limited rethink did take place in 1996, but then only because the unpayability of the debt could no longer be avoided. The awful suffering caused by the debt had little if anything to do with this rethink. Similarly absent from consideration were questions of morality or international law. The debt was regarded as unpayable only because it was palpably unpayble in strictly financial terms: debtor countries were becoming increasingly indebted because of having to take out new loans in order to repay previous loans granted to repay original debt.

The outcome of this slowly developing rethink was the Highly Indebted Poor Country (HIPC) initiative. HIPC, presented with much fanfare as an example of unparalleled Western generosity, laid down very strict economic criteria for inclusion under the scheme. To be poor was not sufficient; neither was being heavily indebted. To qualify for consideration as a HIPC country and therefore potentially benefit from its partial debt “forgiveness”, a country had to be both extremely poor and very heavily indebted. In the event, only 41 countries qualified for consideration under the HIPC. This initial qualification, however, did not in itself result in real debt reduction.

The Germany of 1953 would have come no way close to being considered a HIPC candidate, notwithstanding the destruction of its economy during the war or the poverty of its immediate post-war inhabitants. In terms of today's criteria, the Germany of 1953 was positively well off and would be ranked a middle-income country. This did not matter in the slightest to the London negotiators. Neither did Germany's culpability in two world wars have any bearing on the terms of the London Agreement. The agreement was designed to assist Germany, not punish it, regardless of the enormity of Germany's perceived guilt.

Not one of the main arguments nowadays put forward by the G7, the World Bank, the International Monetary Fund and other international bankers as to why they simply cannot do more to help ease the burden of the HIPC debt is to be found in the London Agreement. Politicians and bankers tell us how tied their hands are by economic imperatives way beyond their control. To a person, they assure us as to the nobility of their intentions, were it not for their powerlessness in the face of cold economic realities. They claim to have stretched the integrity of the world economic and financial system to its limits, in their desire to be as helpful as possible in ameliorating the problems of Third World debt.

The contrast between the terms of the London Agreement and the HIPC initiative gives the lie to their arguments and exposes the hypocrisy of their proclaimed intentions. Consider the following:

Germany was required to pay a maximum of 3,06% of its annual export income on repaying its debt. For the poorest countries on Earth, the HIPC initiative required them to use between 20% and 25% of their export income on debt servicing.

To qualify for consideration under the HIPC initiative, a country's total external debt had to be 160% of its gross domestic product. Mainstream economists see “debt ratio” as being problematic if it is anything between 80% and 100%, that is, if the debt is equivalent to between 80% and 100% of what a country generates a year in its own currency from all economic activities. Germany's debt ratio in 1953 was a mere 21,2%.

To qualify for consideration under the HIPC initiative a country's foreign debt had to be at least 250% larger than its national budget. Germany's “fiscal debt ratio” in 1953 was 4,9%.

The contrast between the London Agreement and the HIPC initiative is even starker when measured against the additional HIPC conditions that have to be met before debt relief is rewarded. Stringent public expenditure cuts in health, education, housing and social security schemes, along with policies and practices to promote and protect a “market economy” free of import restrictions and attractive to foreign investors, are core HIPC conditionalities. A candidate country has three years in which to introduce these requirements. It has a further three years in which to demonstrate the consolidation of its good behaviour before receiving very limited debt relief. The London Agreement placed no similar conditionalities on Germany.

What the London Agreement did was to place conditionalities on the creditors. The HIPC initiative ignored such demands on the creditors. The London Agreement required three major benefits from creditors. First, creditors had to promote German exports because the debt payments were made entirely from trade surpluses. No trade surplus meant no debt payments. Second, Germany had the option of imposing import restrictions if the balance of trade with any of the debtor countries failed to produce a surplus. Finally, creditors were given no resort to sanctions against Germany, in the event of any German infringement of the agreement. The most that the creditors could expect was the convening of direct negotiations with the option of seeking advice from an appropriate international organisation.

The extraordinarily generous terms of the London Agreement are no more difficult to understand than the extraordinary punitiveness of the HIPC initiative. Their differences lie in their political purposes. The London Agreement seems to be generous only when compared to what our governments, financiers and economists now say about what can be done to ameliorate the enormous debt burden of the Third World. The London Agreement was not designed as an instrument of control, as is the HIPC initiative. Rather, the London Agreement was designed politically to promote Germany's reconstruction, but without having to cancel Germany's debts.

What is clear is that in spite of First World claims that everything that can possibly be done to ease the current burden is being done, Third World debt is a very effective killer and continues to destroy innocent lives by keeping hundreds of millions of people trapped in poverty, ignorance and disease.

What the London Agreement exposes clearly is that the Third World debt trap is an instrument of deliberate policy. At the stroke of a First World pen, things could be very different. A contemporary London Agreement would go a long way towards freeing the Third World from its debt bondage.

* Mpumelele Giyose is the chairperson of Jubilee South Africa
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