CAB129-45 — Page 523

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7. The settlement plan should provide that as a rule holders of existing debts denominated in foreign currencies should continue to hold obligations so denomin- ated which would be serviced in foreign exchange. It is, therefore, the amount which Germany can afford to pay in foreign exchange that is likely to be the most important factor. At present Germany has small foreign exchange reserves and is continuing to receive foreign aid or credit. Although it is desirable that service on the debts should be resumed at an early date, it is evident that in the short run, while Germany continues to receive foreign aid, debt service on more than a limited scale would add appreciably to the financial burden of the three Governments. It seems reasonable to assume, however, that in the long run Germany's external payments can be balanced without the need for exceptional assistance. It is necessary, therefore, to make a distinction between what Germany can pay in the immediate future and what she can be expected to pay in the long run.

8. It seems clear that Germany will have sufficient resources to resume ser- vice payments on her external debts under a reasonable settlement arrangement provided that she is determined to do so and to accept the sacrifices which may be necessary for the sake of removing a serious obstacle to good relationships with others, improving her credit standing and opening the way to normal sources of credit. On the other hand, the volume of German pre-war and post-war foreign indebtedness will be disproportionately large in relation to Germany's prospective ability to make payments thereon. Moreover a large part of the pre-war debts has matured and considerable amounts of interest are in arrears. In view of these factors a realistic approach by the creditors to the problem will be necessary, and this will probably involve adjustments of the terms of the debts. The methods and extent of such adjustments are matters which must be determined in the negotiation of the settlement plan.

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9. Other questions for consideration arise from the prospect that some creditors will seek settlement of their debts in Deutschemark (DM). Consideration must be given to what extent and under what conditions it would be possible to permit settlement in DM of foreign currency debts. It will be necessary to assure that the plan provides equitable treatment between creditors who receive payment in foreign currency and those who desire to receive payment in DM, and among creditors holding different categories of German debts. To the extent that any DM settlements may be permitted, it is considered that the use of the DM received will have to be controlled in order to reduce the potential loss of foreign exchange to the German economy and in order to channel these DM into long-term investment in Germany.

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10. The most practicable method of arriving at an equitable treatment of the various creditor groups would seem to be a process of negotiation among them with a view to reaching agreement respecting the treatment to be provided for the various types of claims in the settlement plan. Whatever method is adopted, how- ever, the three Governments will wish to ensure that the settlement arrangements do not lead to inequity or preferential treatment as between some groups of creditors and others. It will be the aim of the three Governments to see that all groups are properly represented, have a full opportunity to participate in working out the arrangements, and agree to the treatment of each type of claim in the settlement arrangements as a whole. They are agreed that the terms of the debt settlement should not vary according to the currencies in which obligations are denominated.

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11. Although the settlement arrangements must be sufficiently flexible to permit of revision when Germany is reunited and to allow the creditors to receive higher annual payments as Germany's ability to make payments improves, they should, nevertheless, provide a stable basis for future financial relations by giving both creditor and debtor a clear picture of their expectations in the future. This aim would not be achieved if there had to be frequent re-negotiation of the terms of the settlement. Therefore, the settlement plan should go as far as possible in including provisions designed to obviate the need of any early re-negotiation. For this purpose it will be necessary to provide in the plan for adjustment in the light of changes in the German economic situation and the manner in which this can be achieved is a subject which will require careful consideration during the Paonegotiations & The plan must in any case clearly contemplate the possibility of

Sre-negotiation at such time as Germany becomes reunited. 523