Tuesday, January 24, 2012

Lessons to be learned from the Greek past

One caveat at the outset: I have not done primary research regarding the content below. And a suggestion: sometimes the past is a good teacher as regards the handling of the future!

A Greek sovereign debt default is about to happen? The financial world will never be the same again? Well, maybe yes, maybe no.

Let us remember the 1830s when part of today's Greece freed itself of the Ottoman rule. The European "powers that be" arranged that Greece should become a monarchy. About 170 years before Otto Rehagel literally deserved to be called King of Greek Soccer, the Bavarian Otto became King of Greece by appointment.

King Otto, of course, knew exactly what Greece needed --- namely, white/blue-efficiency (the colors of Bavaria) for a sunshine country. Those who today think that Greeks should become more like Germans should read up on Otto's experiences.

White/blue-efficiency encountered its limits in the regions of Greece where the "local powers that be" told the efficient emissionaries from Athens what they could do to themselves. By the early 1840s, the white/blue-efficiency was sent back to Bavaria.

Nevertheless, royal credibility made it possible that Greece obtained credit from abroad. Good news? Unfortunately not, because only little of that money found its way into the real economy of Greece. Does that by any chance sound familiar?

Much of that money was immediately booked as fees and commissions. Another big chunk went into the military. Infrastructure and education came at the end. There was little investment in roads, trains, harbors, schools, public administration, etc. Sounds familiar?

Now let me cite a report which I have read recently: "Without a stimulus to the economy, without tax receipts, Greece could not service her debts. New loans were not granted. By 1875, the Greek economy had collapsed. Imports exceeded exports by 60% (note: in 2011, this excess was 135%!). Half the Greeks worked in agriculture where tax revenues could not be obtained. Also, the property rights were uncertain". Sounds familiar?

By 1879, Greece managed to arrange a debt rescheduling. Fresh Money was also provided but that, of course, required Greece to recognize all the past debt which had not been serviced (a good proof that sovereign debt may be rescheduled but it can never disappear unless there is a consensual agreement between borrower & creditors to forgive it). In the late 19th century, Greece's debt service increased from less than 10% to well over 30% of total government expenditures. Economists have calculated later that at least 40% of the new loans landed in "non-productive areas". Sounds familiar?

"Dystichos eptochevsamen" (we are bankrupt) were the famous words of Prime Minister Trikoupis in 1893.

Did foreign creditors forgive any debt? Of course, not! Everyone knew that, sooner or later, the time comes when a sovereign state again needs something. That time came a few years later when Greeks had lost against Turks in the battle for Crete. Greece needed new money and the condition for that was that Greece would recognize all the debt which had been in default since 1893. Does anyone still doubt that sovereign debt never disappears?

Having said all this, I welcome feedback from historians that this, that or the other is not quite correct. It doesn't really matter. What matters is that sovereign debt is a very different "animal" from normal debt. The history of Greece is but one example. There are many, many other examples (one might even start with Germany).

UPDATE ON February 13, 2012
I have now found two articles which give more details on the financial history of Greece: one in the Blog Investopedia and the other one from LISwires.

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