Greek debt standoff a case of deja vu all over again

For historians, the standoff between Greece and its creditors is a case of deja vu all over again. A Greek default on loan repayments of €1.6 billion due to the IMF on June 30th might trigger a bankruptcy, but it wouldn't be the first.

The last two centuries have seen at least four separate Greek bankruptcies – some count seven – while the Greek state was in debt even before it formally existed.

To finance its struggle for independence from the Ottoman empire, the provisional Greek government raised loans valued at between £800,000 and £3.2 million on the London stock market. The British government had an interest in weakening Ottoman rule, and its navy, assisted by the French and Russians, was victorious in 1827.

But the war-torn Greece that emerged was in no position to pay back its debts. Its requests for new loans were refused, and it filed for bankruptcy the same year. A debt write-down came half a century later.

The victorious powers installed a new Greek king – Prince Otto of Bavaria – and loaned him £2.4 million to modernise Greece.

"Instead, the loans were used to finance the bloated Bavarian bureaucracy and military, while the Greeks starved," says Prof Hagen Fleischer, a German-born, Athens-based academic.

When Greece asked for a debt deferral in 1838, its British, French and Russian creditors were agreeable but demanded a new payment plan before 1843. This never came to pass due to a revolt against the king and the second bankruptcy.

Though King Otto was run out of Greece, his debts remained, and its creditors waited for their opportunity. It came during the Crimean War when Greece wanted to ally with Russia. British and French ships blocked the port of Piraeus and, under the guise of collecting customs charges in lieu of debt repayments, forced Greek neutrality.

Systemic corruption

The next round began in 1875 with the ascent of Charilaos Trikoupis, who would serve as prime minister seven times in the next two decades. Dubbed “the Englishman” because of his reserved nature, the lawyer enjoyed the trust of western investors and promised to industrialise the country. To do so he borrowed 730 million francs – 10 times the then Greek annual budget – but most flowed into systemic corruption and military spending.

A bad situation became worse when Greece was sucked into the 1890s global economic crisis that caused a slump in the price of raisins, its main export. In 1893, Trikoupis stood up in parliament to announce: “Regretfully, gentlemen, we are bankrupt.” Third time was not a charm for Greece, however, and its persistent creditors pursued Athens for repayment.

They seized the chance posed by Greece's defeat against the Ottoman empire in the 1897 battle over Crete. Facing reparations payments of four million Ottoman liras, the Greeks, with their tattered credit rating, were forced to accept the installation of the International Finance Commission (IFC) in exchange for loans.

The IFC had been created by the UK, France and Russia to collect Greece's 1830s debts. This troika lent Greece 151 million French francs to pay reparations to the Ottomans and other outstanding loans of 54 million francs.

To collect remaining debts, the IFC was allowed to take income from state monopolies on salt, oil, matches and more.

Disaster struck again in the 1920s when Greece was left struggling after another defeat against Turkey and a flood of refugees from the Asia Minor catastrophe. The Great Depression of 1929 pushed Greece once again into bankruptcy, unable to shoulder debts of 286.8 billion francs.

Final payment

Its loans were not cancelled, however, and repayments merely postponed. The IFC kept watch on its debts from abroad when it was expelled by the occupying Third Reich. The Nazis demanded Athens pay 400 million marks to cover the cost of the occupation.

From 1963, Greece began to repay its old debts and, according to historians, made its final debt payment around 2000. Two years later came the euro.

For economic historian Georges B Dertilis, the tale of Greece and its creditors is a “vicious spiral . . . of war and default”, of painful international financial control leading to economic recovery that allowed new debt and military spending, “that led inexorably to the next default, the next war or both”.