From 2009 to 2015, a troika of organizations were involved in arranging the bailouts of several countries, most notably that of Greece. These entities, the European Commission, European Central Bank, and International Monetary Fund, not only lent money to nearly bankrupt sovereign governments but also made aid contingent on policy changes in the rescued countries. The arrangement may have seemed noteworthy, historically and politically, for the role played by these supranational entities. However, it was not entirely new, not even in Europe. Though perhaps not a troika numerically, a consortium of nations established a supra-sovereign entity of their own over a century ago to resolve a past Greek bankruptcy.
At the time of its independence in 1822, the new Greek state controlled little more than the Peloponnesian peninsula; the remainder of today’s Greece was still under the Ottoman Empire’s dominion. Nonetheless, the heroes of the War of Independence and their descendants planned a larger future for their nation, envisioning a country that spanned both sides of the Aegean Sea, the so-called Megali Idea. It was nothing less than the reconstituting of the old Byzantine Empire.
For decades, Greece’s leaders set about creating what they believed was destined to become Southeastern Europe’s leading nation. Men like Charilaos Trikoupis, Prime Minister for much of the 1880s, invested heavily in Greece’s military and infrastructure, maintaining a reasonably large army for such a small country and going on a construction spree, building railways and canals. Trikoupis’s contributions to Greece were even geographic in nature; his government commissioned the construction of the Corinth Canal which connected the seas on both sides of the country.
These were grand ambitions, and costly ones. Greece in the 19th century could be described as a land of expensive dreams. Years later, when the country was bankrupt, Edward FitzGerald Law, a British diplomat assigned to investigate Greece’s public finances partially faulted these ambitions for its fiscal ruin. In his Report on the Economic and Financial Position of Greece, he pinned the blame for Greece’s fiscal mismanagement on its excessive military spending alongside other issues ranging from foreign currency borrowing to an ineffective tax system. In the preceding decades, Greece had arranged large borrowings denominated in British pounds and French francs, connecting the country with many foreign creditors.
The investors who bought the country’s bonds must have known what they were getting into. After all, Greece had already defaulted on loans issued soon after its independence, in 1824 and 1825. It had not even repaid these by the time it was returning to the capital markets to borrow heavily in the 1870s and 1880s. Indeed, a settlement on the old debt had only been reached in the late 1870s, more than half a century after those early loans were made. Regardless, the prospective returns for investors in the new bonds were massive as they were issued at hefty discounts to their face value.
As an example, in 1879, Greece floated a loan of sixty million francs that paid 6% interest. However, the bonds sold at prices as low as 73% of face value when they were issued. Investors thus collected not only their 6% coupons but upon maturity also received a principal repayment far larger than what they paid for the bonds. Despite the high cost of borrowing, the country returned to the debt markets in Paris and London regularly through the 1880s. The result was surging indebtedness. While Greece’s state debt stood at perhaps two-thirds of GDP in 1877, it rose to over twice annual GDP by 1893, the year the country defaulted.
The 1893 default came at a low point in the global economy and the market for speculative sovereign bonds. Greece’s bankruptcy came on the back of a wave of sovereign defaults that had already ensnared Argentina, Venezuela, and Portugal … plus ça change. Indeed, all four of these countries had defaulted back-to-back in the 1820s as well.
On the eve of its fiscal breakdown, a third of Greek government revenues were going to service debt while recessions and falling commodity prices abroad damaged the domestic economy. The drachma, Greece’s currency, plummeted in value, thus raising the cost of its foreign currency debts. In the late-autumn of 1893, Trikoupis, once again Prime Minister, declared the country bankrupt and proposed a 70% cut to interest payments. However, the situation was only going to get more complicated in the years ahead.
Treaty of Constantinople
In 1897, a pro-independence insurgency in Crete morphed into a larger war between Greece and the Ottoman Empire. Though neither side could claim anywhere near the state-of-the-art military technology employed elsewhere, the Greeks were heavily outnumbered. The country’s decision to enter the war whilst bankrupt, a war hardly forced on it by the Turks, provoked profound frustration among its creditors. Within a month, much of northern Greece was overrun by the Turks and their occupation of Athens was only spared by the intervention of other European nations which essentially negotiated an armistice on Greece’s behalf.
The Treaty of Constantinople, which ended the war, saw limited territorial concessions to the Turks but Greece was forced to pay substantial reparations to the victor. The sum came to four million Ottoman liras. The Turks initially asked for closer to nine million liras but this was far beyond the ability of the Greeks to pay and was negotiated down.
One lira at the time was worth roughly nine-tenths of a British pound or 23 French francs. The indemnity due to the Turks thus amounted to over ninety million francs, only a bit less than some of the larger bond issues floated by the Greeks, but this time there were few eager lenders. As other nations had already intervened in the military situation, there was a desire to use the moment to address the economic situation also. Private bondholders in creditor countries, especially in Germany, called for financial controls on Greece to be incorporated directly into the peace treaty.
At the conclusion of the war, Greek debt stood at a hefty 230% of GDP. Certainly unable to pay any indemnity or to finance further borrowing, a bailout was organized for the already bankrupt country. Together, Britain, France, Germany, Austria, Russia, and Italy extended over 150 million francs to the Greek government at just 2.5% interest under the structure of an amortizing loan. Of this, over ninety million francs immediately went to pay the Ottoman reparations. Rather curiously, though negotiated by diplomats, the loan was syndicated privately, with around thirty banks participating. To get private investors on board, the loan was guaranteed by the governments of Britain, Russia, and France. However, as one would expect, those nations insisted that a far more creditable arrangement for its repayment was needed.
International Financial Commission
To ensure repayment of their loan, the creditor countries established the International Financial Commission (IFC) in 1898, an organization established to oversee the bailout program. The IFC was granted full control over certain tax revenues which were hypothecated for servicing Greece’s mammoth state debt. These revenues included various excise taxes and customs duties as well as profits generated by state-owned companies. Of the revenues collected by the organization, 18% went to fund the administration of the IFC and the tax system. The remainder was split, with 60% of what was left going to repay bondholders and 40% going to the Greek government. In all, almost half of this tax revenue was going to debt service.
Even still, the creditors collected less than their promised interest for some time; the return varied according to the income generated by the taxes. At first, revenues fell well short of what was needed to meet debt payments, though they rose steadily after the turn of the century, eventually returning to the promised interest rate. However, not all creditors of the Greek state were treated equally. Holders of bonds floated abroad got the senior-most claim to the tax proceeds, followed by holders of various domestic loans. Any remaining collections went to the Greek state. Under the bailout terms, any disputes among the parties to the arrangement were to be settled by an arbiter appointed by none other than the President of Switzerland.
In the meantime, the IFC was given a monumental mandate. To take over tax collections in a country known for an ineffective administration of its tax system. The organization’s first president was Sir Edward Law, who wrote his report on Greek public finances five years earlier. Law was joined by one representative from each of the creditor countries though it was he who got credit for insisting on hypothecating certain revenues for debt repayment.
Despite taking on this task, Law was not vilified by the Greek people. Quite the contrary, he was a dedicated philhellene, had a Greek wife, and was widely seen as more sympathetic to the country than the other representatives of the foreign creditors. On his death in 1908, he was even given a state funeral. An Athens street running beside the headquarters of the Greek central bank has since been named after him.
Though it was slow going, the IFC did succeed in many respects. Proceeds to bondholders gradually returned to the promised rate and Greece was able to regain the faith of creditors, at least for a while. The country first began to borrow again through the IFC in 1900. Two years later, Greece began to issue new debt independently. The country’s bonds also fared the next few decades better than other precarious sovereigns. Greece avoided default during the Great Depression, continuing to make debt payments until shortly before being occupied by Germany during the Second World War.
The events of 1898 had some parallels, and many differences, with the more recent sovereign debt crises in Europe. Like those of the 2009-2015 period, the Greek default of over a century ago was part of a wider breakdown in the finances of sovereign governments around the world. It was also, perhaps even more than is typical for state bankruptcies, a diplomatic affair, involving seemingly as many diplomats and politicians as bankers and lawyers.
However, compared to the Greek crisis of the last decade, it seemed undisputed back then that losses to bondholders were inevitable, a question that was debated for years this time around. The default of 1898 also featured a direct handover of even more economic management to outsiders. Perhaps a repeat of the approach of the 1890s was simply politically infeasible this time around. However, it is still too early to tell whether the solutions devised more recently turn out more successfully than those of 1898.
More from the Tontine Coffee-House
Learn about other sovereign defaults including how a Spanish bankruptcy in the 16th century ruined a prominent German banking family.
1. Chatziioannou, Maria Christina. “Greek Sovereign Debt and Loans in 19th-Century Public Discourse.” Journal of European Economic History, Feb. 2019, pp. 21–55.
2. Christodoulaki, Olga. “The Greek Public Debt Restructuring of 2018 through the Lens of History.” The Long Run, 1 Apr. 2019.
3. “Sir Edward FitzGerald Law.” The Hellenic Herald, Nov. 1908, p. 5.
4. Waibel, Michael. “Echoes of History: The International Financial Commission in Greece.” Debt Restructuring Mechanism for Sovereigns, 2014, pp. 10–29.