Professor Richard Roberts, Kings College London
British philhellenes, including Lord Byron, enthusiastically subscribed for Independence Loan issues listed on the London Stock Exchange in 1825 and 1826 to fund the Greek uprising against the Turks.
After a few interest payments made out of principal, the bonds defaulted in 1827.
Nevertheless, a new foreign loan was issued in 1833 to put the young country on its feet and pay an indemnity to Turkey. The issue by a defaulted debtor was possible because the bonds were guaranteed one-third each by Britain, France and Russia and they were issued in Paris.
When Greece defaulted once more in 1843, the bondholders went on being paid by the guarantors. Remarkably the double defaulter made a further external bond issue in 1862 to pay another indemnity, this time to the deposed Bavarian royal family. Again, the loan was guaranteed by British, French and Russian taxpayers, and again Athens defaulted.
The Economist commented that of all foreign debt Greece’s was the "least comprehensible".
Greece eventually settled with disgruntled foreign bondholders, their claims being met from the proceeds of a large sterling Conversion Loan in 1879. That opened the international bond markets to Greece and the 1880s saw a lavish borrowing spree.
This was possible because of the assignment of revenues from state monopolies — salt, petroleum, matches, playing cards, cigarette paper and "Naxos emery", as well as the stamp, tobacco and Port of Piraeus customs duties — to service the debts. Some funds were used for infrastructure projects, but much went to finance budget deficits, which meant yet more borrowing. Greece went the way of all Ponzi finance in December 1893, its fourth default.
Years of wrangling with creditors were overtaken by Greece’s defeat in the disastrous Greco-Turkish war of 1897.
The price of peace, brokered by Europe’s six Great Powers, was a large indemnity payment in hard cash to Turkey. This meant a huge new foreign loan issued under the guarantee of the hapless troika.
With Greek finances in chaos, the Powers established an International Financial Commission to service the bonds, being assigned the various monopoly revenues to do so. However, since revenues from the monopolies varied from year to year, so did the payments to bondholders.
"In fact, these government bonds are," observed a contemporary, "more like the shares of an ordinary limited liability company. No one can tell whether or when the loans will be paid off."
The Greek economy responded to the externally imposed stability and stringency with a decade of rapid growth and the Commission operated until the Second World War.
Monetary turmoil returned with the Balkan War of 1912, which ushered in a decade of war, deficits and inflation.
With the easing of political tension in the mid-1920s, a programme of fiscal consolidation and tight money was implemented that culminated in the drachma joining the gold standard in 1928. The 1920s also saw rapid industrialisation.
These positive developments allowed Greece to resume international borrowing, beginning with the Refugee Loan of 1924 sponsored by the League of Nations.
But the international depression from 1930 hit Greece’s balance of payments and put pressure on the drachma. Capital controls were introduced but proved ineffectual. In April 1932 Greece abandoned the gold standard, devalued the drachma, and defaulted on its foreign debt for a fifth time.
A settlement with foreign bondholders was eventually reached in 1964.
The legacy of Greece’s long exclusion from the international debt market, plus the military junta of 1967-74, was a government debt-to GDP ratio in the late 1970s of 20%.
Following entry into the European Economic Community in 1981, borrowing soared and the ratio hit 90% in 1993. Semi-stable in the 1990s, the ratio soared again from 2007, with the onset of the financial crisis, reaching a dizzy 175% by 2014.
In every previous Greek debt crisis since 1827, the solution has been default (along with inflation and devaluation).
The historical record suggests that a sixth Greek default is the most likely eventual outcome of the current wrangling, followed doubtless by some form of restructuring supported by European Union taxpayers. But yesteryear’s toolkit also holds a more intriguing idea — a revamped International Financial Commission.
