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Could debt relief ease Euro woes?

16 July 2012 Last updated at 01:24 James Melik By James Melik Reporter, Business Daily, BBC World Service Girl carrying fruit on her head Since receiving debt relief Ghana has achieved a 50% reduction in poverty relative to 1990 Despite measures and initiatives being proposed by political leaders, history suggests that the path leading Europe back to prosperity will not be smooth.

Many Greeks, battered by austerity, would look with envy at some African countries that had their crippling debts cancelled in the latter part of the 1990s to allow them a fresh start.

The Heavily Indebted Poor Countries (HIPC) Initiative was the first international response to provide comprehensive debt relief to the world’s poorest, most heavily-indebted countries.

“The idea was that these countries would present a programme of macro-economic reform, along with good fiscal and trade policies, and only then would they qualify for debt relief,” says Shantayanan Devarajan, chief economist of the World Bank’s Africa Region.

In Africa there was a very clear decision to go with the growth strategy rather than the austerity strategy.

“Instead of having half the population rising up against the austerity measures, which we are seeing in some European countries, we actually saw increasing public support for the policies to promote growth and reduce poverty,” he says.

European Model

Apart from debt relief in African countries, there has been a precedent in Europe.

In the effort to promote recovery after World War II, part of the Marshall Plan – America’s huge aid programme – was a strategy for dealing with the vast debts that the vanquished nations of Europe had run up – most notably, those of Germany.

Albrecht Ritschl, Professor of Economic History at the London School of Economics, explains how Germany received debt relief:

Continue reading the main story
A large part of academia and the media are saying we won’t get out of this crisis unless we have a heavy write-off”

End Quote Professor Albrecht Ritschl London School of Economics, “Every recipient country of the Marshall Plan had to sign a waiver which said that all Marshall aid would amount to what was known as a first charge to Germany – it meant that unless this debt was repaid by the Germans, no other charges could be brought against Germany.”

It meant that from 1947, all German debt was in effect blocked.

“If you were a merchant in the Netherlands and you had claims against the Germans because they cleared out your factory premises during the early 1940s, you couldn’t go to court to seize any German export deliveries which came into the Netherlands,” he says.

Greek perspective

This debt relief that Germany enjoyed was reflected in its national budget.

In the 1950s the ratio of national debt to national income was less than 20%, at a time when the UK had debt-income ratios closer to 175%.

What Germany did next was to conclude treaties with individual countries and people.

“The only country to protest loudly in the 1950s and 1960s and again in the 1990s, was Greece,” Dr Ritschl notes.

“That is why when you talk to someone in Greece, not too many of them have a guilty conscience about defaulting on their debt to the Germans,” he says.

Protesters and police and Spain Protests against austerity cuts have taken place in Greece and Spain

“You still owe us some and now we owe you some, so now we are quits.”

Germany prospered after debt forgiveness and some people think the time has now come to make amends for that, by picking up the tab for Europe.

“A large part of academia and the media are saying we won’t get out of this crisis unless we have a heavy write-off,” he says.

“That would mean Germany, France and the UK taking serious action to restructure their banking systems because of their exposure to southern Europe,” he concludes.

Who qualifies?

Countries like Spain, Ireland and Greece would undoubtedly like to have a fresh start, but the World Bank’s Shantayanan Devarajan says they would have to ensure there was not another debt crisis 10 years down the road.

“The fact they are suffering a debt crisis means there is a problem,” he says.

“Countries have to improve competitiveness, export more, and collect more tax revenues,” he says.

Continue reading the main story Shantayanan Devarajan - World Bank
Debt relief created that space where Ghanaian policy makers could use their resources for education, health and infrastructure, rather than paying their creditors”

End Quote Shantayanan Devarajan World Bank He also maintains that debt relief should not be applicable to everybody.

“There have to be some criteria to see who should get it. Some countries are not in a position to benefit from debt relief, so a collective decision has to be taken among all the stakeholders,” he says.

As far as Africa is concerned, debt relief has had more of a positive effect in some countries than others.

“A country like Ghana, which received debt relief in the early 2000s, has enjoyed rapid economic growth and more importantly, rapid poverty reduction,” he says.

“Debt relief created that space where Ghanaian policymakers could use their resources for education, health and infrastructure, rather than paying their creditors,” he asserts.

But there are other countries that received debt relief where both the growth and the poverty reduction experience has been more tempered.

“One example would be Senegal, where economic growth has not matched that of Ghana, Tanzania, Ethiopia or Rwanda and as a result, the poverty reduction has been somewhat anaemic,” he says.

Some of that debt relief was provided by taxpayers in the rich world, but the most important part was the fact that the debt relief was accompanied by a reform programme.

“These programmes have not been dictated from outside, but came out of a political consensus within the country,” Mr Devarajan says.

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