City of Berlin owes trillions of euros to small town

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56 Responses to “City of Berlin owes trillions of euros to small town”

  1. Paul Renault says:

    I bet Berlin figures that eventually their town limits will expand enough to absorb Mittenwalde – which is nowhere near any forest, let alone in the middle of one.

  2. The Tim says:

    “540-year-old debt…  debt that dates back to 1562″

    Um, 1562 was 450 years ago, not 540 years ago…  Grade school math fail.

  3. Why would you add interest AND adjust for inflation? That’s double dipping.

    • Lemoutan says:

      Especially considering the German inflation in the 1920s.

    • cubby96 says:

       Agreed.

    • Guan Yang says:

      Yeah, that’s totally ridiculous. Debt contracts aren’t normally adjusted for inflation unless it is explicitly inflation indexed debt, like the kind issued by some governments.

    • Moriarty says:

       Agreed. Inflation is irrelevant.

      Also, the article doesn’t mention what the interest rate is.

      Also, 1562 wasn’t 540 years ago. (It’s not just a typo, the number appears several times.)

      Also, which sort of Guilder is it, and what is one worth in Euros?

      Get it together, Christian Science Monitor.

      • LennStar says:

        Serious answer: A guilder is worth in Euro what you can get for it. That is the most correct answer you will get.

        If you want to know what you could have bought with a guilder back in time when the world would be what it is now – then you adjust for “inflation” , meaning you compare the prices of bread, egg, houses and so on. Depending on who you ask you can get number as differently as “8000″ or “140000″ (random numbers), because it is not an easy task – the world has changed a bit after all.  Do you compare the price of a modern car with a horse? Or an ox-cart? How do you compare the prices of a dishwasher to an maidservant?

        • Lemoutan says:

          How do you compare the prices of a dishwasher to an maidservant?

          I have a whole equerry do my dishes.

        • Moriarty says:

           “A guilder is worth in Euro what you can get for it.”

          Yes, of course, but presumably a guilder is an actual coin made of a set mass of precious metal, which is what the actual debt owed would be. What goods and services you could exchange that amount for then and now doesn’t enter into it.

  4. Joe Buck says:

    Right. Interest is charged in part to compensate for inflation. You don’t get to count both.

    • malindrome says:

      Right.  But also because of the time-value of money.  The dollar you pay me back next week is not as valuable to me as the dollar I lend you today, even if inflation is zero.

  5. Bashtarle says:

    And what have we all learned about paying debt back in a timely manner? 

    Oh well maybe Berlin can work out a decent payment plan…. or something involving indentured servitude for the next dozen or so generations? 

    Maybe the people of Mittenwalde will just march in and start annexing things. Just casually strolling into a eatery and planting a tiny flag in someone elses sandwich and claiming it in the name of (insert important name here) has always been one of my childhood dreams……. lucky Mittenwaldeiens 

  6. malindrome says:

    How typical, Germans!  They borrow too much money, then refuse to pay it back!  Maybe if they worked a little more and shirked their debtors a little less, the economy would be in better shape.

    /snark

    • zombiebob says:

       Nice

    • Navin_Johnson says:

      Austerity time for Berlin.

      • retepslluerb says:

        In theory, they are on austerity. Berlin’s a money pit since after WW2 and didn’t get back on her feet after reunification. They are the biggest benefactor of the transfer union within Germany.

    • onereader says:

       Well, that’s exactly what they historically did multiple times.

      Other more responsible countries, like Italy, never defaulted and consequently carry huge debts. 

      • retepslluerb says:

        Italy defaulted in 1940 against Allied powers. 

        As with Germany – which did default because of war costs and reparations multiple times, yes – the brunt of the modern sovereign debt is post WW2. 

  7. cubby96 says:

    TL;DR: compound interest is your friend, but don’t get on it’s bad side.

    Well, sensational headlines are sensational, at least.  The math here is terrible.  Not that the Christian Science Monitor has a stellar editorial reputation, but it may be just the specific writer and/or editor of this story.

    For starters, yes the time is 450 years.  Could be a simple transposition.  The statement in the full article that they try to get paid every 50 years would seem to corroborate the math here.

    The math should be 400 guilders, times 1.06^450 for compounding.  Then converted from guilders to Euros at 10,000 Euros/guilder (taking the CSM at their word on this).
    400*(1.06^450)*10000 yields a figure just shy of 1,000,000,000,000,000,000 Euros.  That’s a quintillion, or a billion billion Euros.

    Trying to keep this at orders of magnitude – split among the roughly 9,000 people in the hamlet of Mittenwalde, this would make each of them about 1,000 times as wealthy as Carlos Slim (currently the world’s richest, per Forbes).  If this unpayable debt were instead split among the entire population of the planet (currently ~7 billion), each of us would get 140 million Euros.  Not that it would matter, because if everyone has the same amount of money, every good would likely inflate in price to compensate.  It would however,  make all historical assets and debts that aren’t physically held completely irrelevant.  What an interesting thought.  So long student loans and national debts!  Don’t worry, the plutocrats will find a way to remain in charge.

    Anyway, the debt will of course never be repaid, as politicians would get involved and muddy it up until the fine people of Mittenwald are demonized for holding Berlin hostage economically and the public forces a change in law.  There might be a token payment made to cover the principal, but certainly not the interest.

     Also, if you can pick the bank that won’t fail or fee you to death, put a dollar away today.  In 500 years, your descendants might own the planet.

    • cdh1971 says:

      Berlin could contract with a boutique mint to print several one-trillion Guilder notes, or for a more dramatic presentation, they could contract to print a lesser denomination. 

      Berlin could even recruit one of the various pretenders to the throne of some royal or imperial house to deliver the payment.

    • Ultan says:

      A better figure for the value of the Guilder is 75 Kreutzer as of 1551. The Reichstaler was fixed by the Diet of Augsberg in 1566 as 29.23 grams of 88.9% silver, and the Taler had in 1551 been fixed at 68 Kreutzer, which gives a value of 0.92 troy ounces fine silver to the Guilder, which at today’ prices is worth 20.46 Euros. The principal is therefore around 8200 Euros.
      (See http://en.wikipedia.org/wiki/Reichsm%C3%BCnzordnung )

      While a 6% rate does give a crazy number of 2E15 Euros, the real long-term interest rate after transaction costs, inflation and taxes has historically been more like 2%, which gives a bit over 60M Euros, which is actually payable. (At 1% it would be only 720,000 Euros,  at 3% it would be 4.9B Euros. The rate makes a huge difference when compounding over 450 years.)

      The best course for Berlin would be to pay only simple interest. This was likely the actual obligation – compound interest did not become usual until much later. At 6% simple interest, the debt is only about 230,000 Euros.

      • billstewart says:

        Thanks for looking up the information about the Guilder!

        Interest rates adjusted for inflation don’t make sense here, unless you’re going to assert that the debt got continually adjusted into the local monetary standards and wiped out during the Wiemar hyperinflations.  If you take out a mortgage with compound interest, inflation may affect how much the currency units (dollars/euros/guilders/etc.) you’re repaying with are worth in terms of other commodities, but that doesn’t affect how many of them you have to pay to your creditor.  A guilder that’s 0.92 troy ounces of silver is still 0.92 troy ounces of silver a few centuries later, even if it doesn’t buy as many pounds of wheat or as many buggy-whips as it used to or pay for as many days of a farmer’s labor.

        The real question becomes whether the loan specified compound interest or not.  Was it the business practice of the time, or had the concept not really been invented or popularized yet?  If it’s just simple interest on the principal, then yeah, that’s something they could just pay.

  8. corydodt says:

    > always to no avail.

    The city of Berlin does not have trillions of euros. What exactly did they expect to happen?

    Perhaps they should normalize the debt to the year 1900 and pay the debt+interest on that period.

  9. foobar says:

    This article is horrible. Non compound interest would amount 11,200, as per the quote. That would, I think, be the case as compound interest would be usury, and thus illegal for Christians of the time.

    The Wall Street Journal claims a guilder is worth 0.88 Euro today, so Mittenwalde is owed 9,856 Euro.

    Somehow, I doubt that would cover the costs of a lawsuit. They’re within their rights to try, I suppose.

  10. Terry DiPaolo says:

    According to Radio Berlin Brandenburg (RBB), the debt would amount to 11,200 guilders today, which is roughly equivalent to 112 million euros ($136.79 million).

  11. Eric Calhoun says:

    That seems cheating to both charge interest continually and to adjust for inflation.  I’d be outraged if my student loan was converted from 2001 to 2012 dollars on top of all the interest I’ve paid over the years.

  12. The numbers in the article make very little sense, and if 400 Guilders in 1562 made 11200 Guilders today, that’d be an interest rate of .7% — unlikely. Then again, the factor of 10000 to convert guilders into Euros is a bit weird, given that there were not one but at least two currency reforms in between where the previous currency was essentially completely worthless before the reform (and that’s just the ones I know of, in the 19th century).
    Also: good luck getting _any_ money back from Berlin these days. It’s the part of Germany with the lowest tax income per person. By far.

    • foobar says:

      In the 16th century, the Church forbade compound interest on loans. Only Jews could offer loans on those terms, and often it was the only work they were permitted to do.

  13. Coal Miki says:

    To my knowledge, the town of Mittenwalde is not a licensed lender of money, so it would be unlawful of them to charge interest. The loan was akin to lending a friend $10 for a taxi. They are owed 11,200 guilders and not a penny more.

  14. Robert says:

    The town could incorporate, and then pass Berlin off to a collection agency. That usually works.

    • Lemoutan says:

      But then Berlin would just find a XVIc painting of Mittenwalde on display in any of Mittenwalde’s public buildings. As the clear superior authority they’d simply counter-claim backdated charges for unlicensed use via Getty Images.

  15. gellfex says:

    How in the world do you determine  the value of a 1562 guilder in contemporary euros without feeding it through a commodity like an ounce of gold, or a basket of commodities traded in both eras?  Currencies are too subject to historical incidents, like Weimar hyperinflation.

    • billstewart says:

      The guilder really was a coin of a specific size – a comment up above says it’s about 0.92 troy ounces of silver.  You might discuss what that’s worth in other commodities like wheat or a day’s labor for an uneducated but strong peasant, but fundamentally it’s about an ounce of silver. 

      Throughout most of history, coins have had two values – the commodity value of the actual metal, and the value of the politician’s picture on the front – and paper banknotes have been an assertion that you can redeem the note for some metal and/or a pile of coins with politicians’ pictures on them.  The politician’s picture was  originally an assertion that the coin really had as much metal as he/she said, though it rapidly became a way to say that you had to treat the coin as if it had that much precious metal, but even so, they could still only dilute it so much (unlike paper banknotes, where you can put as many zeroes by the number as you can fit, leading to Weimar- or Zimbabwe-style hyperinflation.)

  16. Tchoutoye says:

    Berlin should sell its property to repay the debt. For instance, the Reichstag would make a perfect casino for rich tourists.

    • LennStar says:

      Not possible. It is already an casino for rich corporations. 

    • retepslluerb says:

      Not possible. The Reichstag is property of the Republic of Germany, not the city or state of Berlin.  

      (Actually,  it’s registered to the German Reich, but in German legal practice, that’s the same thing, as there German Reich didn’t end in 195 but simply transformed itself by getting a new name, constitution and form of government.) 

  17. I had some trouble following their math. I gather that 400 guilders in 1540 was a pile of gold pieces not paper money, but how do we get from there to “11200 guilders today”, then to 112 million euros??? The only “guilders today” I know of is the dutch currency that’s worth around a dollar or half a euro. Also note that when Europeans say that 112 million at 1.06 interest raised to the 540th power is “trillions” they refer to the European “trillion” which is 10^18, not the American “trillion” which is only 10^12. Not sure why Christian Science Monitor, an American journal, didn’t bother to convert that word to American English: “quintillions” would be the proper word.

  18. Marios P. says:

    Germany has a reputation of not paying back what it owes

    • retepslluerb says:

      No, a *history* of not paying debt. Her *reputation* is so good that right now people pay Germany money to borrow from them. 

      That said, Germans shouldn’t get too smug about that – right now, the whole Euro crisis is  fancy way to divert money backed by taxpayers into German and other banks w/out a clear benefit to Southern European nations.  

      I’ve had people default on 5-digits debts owed to me (for completed and resold work), I don’t see why we should cover for frivolous lending just because of a “too big to fail”-spiel.

  19. abaris23 says:

    FYI Mittenwalde does NOT want that money back. It was a little PR Joke the town  initiated (though the debt exists). Nonetheless, nobody is asking for money in this case.. in fact the Mayor even regrets his little trick.

    Oh and btw.. history of not paying debt? That sounds like a quote from Michael Moore… I bet you could say the same for almost every other “big” country on earth.

    • retepslluerb says:

      Well,  it’s a matter of as the question, so the answer. (I think that’s close enough to  Wie man in den Wald hineinruft, so schallt’s heraus.)

      I think sovereign defeault created by war and especially reparations should be handled and critiqued differently than that created by overspending, but there’s no denying that Germany profited enormously of the  London Agreement on German External Debts. 

      Right now some Germans act as if they are asked to singlehandedly pay for Southern European laziness, which is so wrong and grating on so many levels. 

      (The same happens in Germany too, by the way. Bavarians started whining about being a net payer of the fiscal transfer union almost immediately after stopping to be a beneficiary for about 40 years.)

  20. Ryan Lenethen says:

    You know what? I don’t think they are gonna pay. Just saying. They might do something symbolic, but that is likely about it.

  21. Amelia_G says:

    A failed Landesbank was recently split up into three parts IIRC: a “consulting firm,” a smaller bank that held the assets, and an entity that held the toxic paper and presumably won’t be around for long. Could Berlin shove this debt onto East Berlin?

  22. James Hardy says:

    OK, the colossal nerd in me has done the maths, and I’m afraid Berlin doesn’t owe any where near as much.

    Starting at 400 Guilders, with 6% compound interest by 1566, it would be 504.99G. At that point the Reichstaler was introduced so would be converted to 336.66 Reichsthaler.

    The next currency change was 1750, by this time the debt would be worth 15,257,079.25 Reichthaler which would convert to 13,077,496.50 of the new Prussian thaler. The introduction of the veirensthaler in 1857 can be ignored because it was a conversion at par.

    In 1873, the debt had grown to 16,949,076,504 veirensthaler which would have been converted to 50,847,229,511 Gold Marks. a huge amount

    in 1914, the mark was taken off the gold standard and was replaced by the papiermark at par at which point the debt was half a trillion Marks. This is probably the high point in actual value of the debt (the value of half a trillion little lumps of gold). After this inflation started to take effect. By 1924, the debt was nearly a trillion marks, but by this point that was only worth US$1. They revalued and introduced a new Reichsmark under which the debt was not even a full mark. by 1948 it was at the heady heights of 4 marks.

    As the town is in the east and half of berlin was too, let’s assume we are using the Ostmark (the calculations are more favourable for Mittenwalde that way). That was replaced at par, and the debt continued to grow up to 46 Marks by the time of German reunification. the Ostmark was replaced with the DM under a complicated currency reform with different exchange rates for different purposes. Lets assume the most generous 1:1 rate, so we get 46DM. Over the next 8 years, it would have compounded to 74DM which would become €37.86 which has compounded to €85.60

    TL;DR — 1920s Hyperinflation screwed Mittenwalde out of the value of the debt – it’s actually not a great deal of money. The publicity value for the town is certainly worth far more

  23. billstewart says:

    I used to live near Middletown New Jersey.  A news story came out in the ?1980s?1990s? that the township had originally bought the land from a local Indian chief in return for a payment of a certain amount of merchandise every 50 years to him or his descendents, and somebody came to the township council saying he was descended from the chief and it was time for another 50-year payment. 

    It’s possible that his claim to be descended from the chief was bogus, or it’s possible that he had good documentation, and the merchandise would have probably cost a lot less to buy today than back in the mid-1600s, but the town didn’t want to pay, and instead decided to have a ceremony honoring the township’s heritage of peaceful relationships with the local Indians. 

    Unfortunately, this was before all small-town newspapers were on the Internet, especially in text form as opposed to images, and my Google-fu has not found it.  (That also means I don’t have documentation about the township police chief buying a tank, though there are lots of articles about septic tanks and water tanks :-)

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