US may join Germany in Pantheon of defaults

Reneging on its debt obligations would make the US the first major Western government to default since Nazi Germany 80 year ago.

Germany unilaterally ceased payments on long-term borrowings May 6, 1933, three months after aDolf Hitler was installed as Chancellor. The default helped cement Hitler's power base following years of political instability as the Weimar Republic struggled with its crushing debts.

"These are generally catastrophic economic events," said Professor Eugene N. White, an economics historian at Rutgers university in New Brunswick, New Jersey. "There is no happy ending."

The debt reparations piled onto Germany, which in 1913 was the world's third biggest economy, sparked the hyperinflation, borrowings and political deadlock that brought the Nazis to power, and then the default. It shows how excessive debt has capricious results, such as the civil war and despotism that ravaged Florence after England's Edward III refused to pay his obligations from the city-state's banks in 1339, and the Revolution off 1789 that followed the French Crown's defaults in 1770 and 1788.

Failure by the world's biggest economy to pay its debt in an interconnected, globalized world risks an array of devastating consequences that could lay waste to stock markets from Brazil to Zurich and bring a $5 million market in Treasury backed loans to a halt. Borrowing costs would the dollars role as the world's reserve currency would be in doubt and the US and world economies would risk plunging into recession -- and potentially depression.

Germany, staggering under the weight of 132 billion gold marks in war reparations and not permitted to export to the victor's markets, was a serial defaulter from 1922, according to Albretch Ritschl, a professor of economic history at the London School of Economics. that forced the country to borrow to pay its creditors, in what Ritschl calls a Ponzi scheme.

"Reparations were at the heart of the issue in the interwar years." Ritschl said in a telephone interview. "The big question is why anyone lent Germany a dime with those hanging over them. The assumption must have been that reparations would eventually go away."

While a delinquent corporation may go out of business, be broken up, or sold to a competitor, or otherwise change its shape, sovereign defaulters are different. Weimar Germany defaulted payments, stopped transfers, reformed the currency and wrote down debt, wringing a series of agreements from its creditors before the Nazis repudiated the obligations in 1933.

It took until the 1953 London Debt Agreement to pay rest to the nation's reparations and difficulties, essentially by postponing any payments until after reunification in 1990 of East and West Germany, according to Timothy Guinnane, Professor of Economic History at Yale University in New Haven, Connecticut. The U.S, eager to ensure Germany was a bulwark against communism, pressured creditors to agree to debt relief, according to Guinnane.