Ops: la Grecia non ha mai ripagato i debiti

A quick trawl through my notes on the history of Greek debt produces some striking parallels – particularly on the issue of foreign debt and political independence.

1825  first Greek loan in London – while Greece was fighting for independence.

Comment by a sceptical English observer in Greece: “The majority of the Greeks do not rightly comprehend the meaning of a loan, but simply conclude that it is some European method of making a present.”

The loan was spent on defective military hardware and went into default within one year.

It was not settled until 1878 (!) at a 70% reduction in principal, and an 89% reduction of arrears of interest.

1832   Greece now independent and  borrows in Paris with foreign government guarantees (British, French, and Russian) at 5% to finance reconstruction.

1836   Loan in default – funds had been largely misspent.

Reaction of the British ambassador in Athens:  “a really independent Greece is an absurdity. Greece is either Russian or English, and since she is not Russian she must be English… I am openly waiting for March 31st, when the interest and capital repayment of the debt are due… Bankruptcy is imminent, I assure you, and I am delighted.”

However, Greece managed to avoid a takeover by its creditors for the time being by making sporadic payments and playing the Russian card.

1854   Britain and France annex the port of Piraeus to protest non-payment and misuse of funds.

1857   Financial Commission takes over Greek public finances. Britain and France withdraw from Piraeus.

Financial commission determines that Greece can only afford annual debt service equivalent to 1.5% of original loan.

1879-90  Greece borrows again (having finally settled its old debts) at current yields of between 6% and 8% (the yields described as ‘unaffordable’ and ‘ruinous’ by the current Greek government).

However, most of the money goes on military spending and to cover current consumption.

1893       Greece defaults, in the wake of defaults by Argentina and Portugal (something familiar about these names, I seem to think), and only pays 30% of interest.

Foreign bondholders’ demands for financial control were strongly resisted by domestic opposition.

1898    International Financial Commission finally takes over administration of Greek revenues – lenders accept 30-40% of original interest in hard currency.

Under IFC control, Greece is able to borrow with foreign government guarantees at only 2.5% – the lowest rates in Greek history.

Even when foreign government guarantees are lifted, interest rates are still only a relatively modest 5%.

Fast forward to twenty-first century….(on the assumption that history is circular)

2000-   Greece borrows at favourable rates, but misspends the money on current consumption.

2010    Greece defaults. Greece loses its financial independence to the IMF in the teeth of domestic opposition (which still has memories of creditor financial control in the early twentieth century). The IMF ensures that the budget is balanced in exchange for lower interest rates. Debt service is reduced to affordable levels, and borrowers take a large haircut.

The moral of the tale? (other than don’t lend to Greece)

Foreign lending to countries who fritter away the money on current consumption is very dangerous for lenders, who may lose their shirts. It is also very dangerous for borrowers, who may lose their financial independence.

Greece’s history is that of a very weak borrower confronted by powerful lenders. However, I have always been worried about the implications of wealthier western countries becoming dependent on foreign creditors – something that would never have been allowed to happen in the days when financial self-sufficiency was regarded as a fundamental criterion of great-power status.


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