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Time Flies

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. 

Full post as published by Credit Slips on October 01, 2010 (boomark / email).