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Newly independent Greece had an odious debt round her neck

Since 2010, Greece has been the centre of attention. Yet this debt crisis, mainly the work of private banks, is nothing new in the history of independent Greece. The lives of Greeks have been blighted by major debt crises no less than four times since 1826. Each time, the European powers have connived together to force Greece to contract new debts to repay the previous ones. This coalition of powers dictated policies to Greece that served their own interests and those of a few big private banks they favoured. Each time, those policies were designed to free up enough fiscal resources to service the debt by reducing social spending and public investment. Thus Greece and her people have, in a variety of ways, been denied the exercise of their sovereign rights, keeping Greece down with the status of a subordinate, peripheral country. The local ruling classes complied with this.

This series of articles analyses the four major crises of Greek indebtedness, placing them in their international political and economic context – something which is systematically omitted from the dominant narrative and very rarely included in critical analysis.

by Eric Toussaint

PART 1 - How did the loans work?

To fund the independence war it waged against the Ottoman Empire from 1821 and to establish the new state, the provisional government of the Hellenic Republic contracted two loans from London, one in 1824 and the other in 1825. Bankers in London, by far the biggest financial centre in the world at the time, hastened to set up the loan, seeing it as a means of making a huge profit.

Internationally, the capitalist system was in full speculative phase which, throughout the history of capitalism, has generally been the final phase of a period of strong economic growth preceding a backlash. That backlash takes the form of bursting speculative bubbles and then a period of depression and/or slow growth. Bankers in London, followed by those of Paris, Brussels and other European finance centres, were in a frenzy to invest the enormous amounts of liquidity at their disposal. Between 1822 and 1825, London bankers ‘harvested’ £20 million sterling on behalf of leaders of the newly independent Latin-American countries (Simón Bolívar, Antonio Sucre, Jose de San Martín and more) to finalize their independence struggle against the Spanish crown. The two Greek loans of 1824 and 1825 came to a total of £2.8 million, i.e. 120% of the country’s GDP at the time.

Both in the case of Greece and in that of the young revolutionary independent governments of Latin America, the new states were barely emerging and did not yet have international recognition. Spain was opposed to European states giving financial support to the fledgling Latin-American ones. After all, it could reasonably be supposed, at the time, that the independence struggles were not completely over. Lastly, loans were being granted to republics whereas hitherto only monarchies had been admitted to the club of sovereign borrowers.

All that goes to show just how eager bankers were to take financial risks. That banks would lend 120% of a country’s entire annual product to the provisional government of a Greek state only just emerging under wartime conditions is a clear indication of a reckless desire to make juicy profits. Alongside the bankers, big industrial and commercial companies also supported this craze, as the amounts loaned were largely going to be used by the borrowers to buy the new armies weaponry, uniforms and equipment of every sort from the United Kingdom.

How did the loans work?

London bankers issued sovereign bonds in the name of the borrower states and sold them on the stock-exchange in the City. Most of the time, bonds were sold for less than their face value (see the illustration of an 1825 bond worth £100). Thus each bond issued on Greece’s account for a face value of £100 was sold for £60. This meant that Greece obtained less than £60, once a hefty commission had been deducted by the issuing bank against an IOU of £100. This explains why for a loan valued at £2.8 million, Greece only received payment of £1.3 million. Two further important facts: if the interest rate on the Greek bonds was 5%, it was calculated on the face value so the Greek government had to pay £5 a year to the bearer of a bond valued at £100, which was an excellent deal for him or her, bringing a real profit of 8.33% (and not 5%). On the other hand, for the borrower state, the cost is exorbitant. In the case of Greece, the government received £1.3 million but had to pay interest each year on the £2.8 million ostensibly borrowed. That was not sustainable.

In 1826, the provisional government suspended debt payments. Studies of this period generally explain the suspension by the high cost of military operations and the continuing conflict.

In fact, the causes of Greece’s default were not only internal; international factors, beyond the control of the Greek government, also played a very important role. For one thing, the first great global crisis of international capitalism began in December 1825, with the bursting of the speculative bubble created in the London stock-exchange over the previous years. That crisis caused a fall in economic activity, bringing down numerous banks and creating an aversion to risk. Starting in December 1825, British bankers, followed by other European bankers, ceased making foreign and domestic loans. The new states, expecting to finance their debt payments by taking out fresh loans in London or Paris, could no longer find any bankers disposed to lend. The 1825-26 crisis affected all the finance centres of Europe: London, Paris, Frankfurt, Berlin, Vienna, Brussels, Amsterdam, Milan, Bologna, Rome, Dublin, Saint Petersburg, and the list goes on. There was an economic depression and hundreds of banks, traders and manufacturing companies went bankrupt. International trade fell through the floor. Most economists consider the 1825-26 slump to be the first of the great cyclic crises of capitalism.

When the crisis broke in London in December 1825, Greece and the new Latin-American states continued to repay their debts. However in the course of 1826, several countries – Greece, Peru and Great Colombia which included Colombia, Venezuela and Ecuador – were obliged to suspend repayments. This was partly due to banks refusing to grant new loans, and partly because states’ revenues were adversely affected by the deterioration of the economic situation, and particularly international trade. By 1828, all the independent Latin-American countries, from Mexico to Argentina, had suspended payments.

In 1829, the provisional Hellenic government made their London creditors an offer to resume payments, on condition that the debt be reduced. The creditors refused, demanding 100% of the nominal value; no agreement was reached.

From 1830 on, three of Europe’s major powers – the United Kingdom, France and Russia – formed the first Troika in modern Greek history and decided to establish a monarchy in Greece with a German prince at its head. Negotiations began over which prince to choose: Leopold of Saxe-Coburg Gotha, Prince Otto of Bavaria or someone else? Finally Leopold was placed on the throne of Belgium which became an independent state in 1830 and the Bavarian prince, Otto von Wittelsbach, was chosen to be the King of Greece. At the same time, the three great powers agreed to give their support to British and other European banks which, through them, bought Greek bonds. The idea was also to exert pressure on the new Greek state to get full reimbursement of the loans of 1824 and 1825.

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