The history of debt defaults in Greece
By Dimitri Lippe
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[dropcap]G[/dropcap]reece has a unique economy that begets economic crises. Along with a tumultuous political history, it has very few raw materials, infrastructure, and capital. Its main industry is tourism, which accounts for 18% of GDP. When the 2008 recession occurred, tourism began to decline as a result, which had a severe effect on the nation’s economy. Due to the lack of capital already present in Greece’s economy and its history of default, investors are less likely to support Greek companies and their relatively volatile nature.
Notwithstanding these setbacks, Greece performed extremely well economically in the latter half of the 20th century. After World War Two and the Greek Civil War, the economy was in shambles. The Marshall Plan and advantageous macroeconomic policies bolstered the economy in order to compensate for its unfortunate state. From 1950 until 1973, Greece had an average growth rate of 7.7%, which is remarkably high. At this time, it was second to only Japan.
This growth was facilitated by a number of important initiatives that attempted to offset Greece’s economic downfalls. The drachma was drastically devalued, tourism and the chemical industry were developed and infrastructure projects were expanded. Greece did not escape the stagnation of the 1980s. But it did enjoy relative prosperity and did not default on its external debt as many other European countries during that time. This was ultimately a short period of economic prosperity in a long history of default and irresponsible borrowing.
Greece has defaulted 5 times in the last two centuries on various loans. It defaulted first in 1826 on loans from the London Stock Exchange in order to finance the War of Independence against the Turks. In 1843, Greece defaulted again on an 1832 loan from Britain, France, and Russia to help stabilize the economy and rebuild its government. This money was used by King Otto of Bavaria for military upkeep as well as general government function. Greece was kept out of international capital markets for years, during which time the Greek government depended on the National Bank of Greece for loans. Capital markets opened again to Greece in 1878 when they ended a period of default, and a great deal of money flowed into Greece.
This led to irresponsible borrowing and default again in 1894. It was in the process of negotiating with its creditors when it lost the Greco-Turkish War in 1897, with the result of exorbitant reparations. Greece then signed a treaty with the great powers, which led to the implementation of the Commission Financière Internationale de la Grèce. The Commission pushed the Greek government to avoid tax evasion and supported infrastructure building, especially railroads. This oversight and imposition of policies for economic improvement occurs in the present day as well, which we have seen in the bailout agreements this past summer.
In 1932, Greece defaulted yet again, due to the Great Depression. Many countries were unable to pay their loans, but Greece’s default lasted especially long—until 1964, the longest of all the times that Greece has been in default. This economic history is troubling, because it shows a frequent inability to pay loans.
Greece’s economic history has informed its current economic situation, and it is sure that tax collection and government spending could be reformed. However, many recessions are a result of exogenous factors or other circumstances and are impossible to control. The vicious cycle that has befallen Greece contributes to its lack of success and inability to lift itself out of default and economic recession.
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Dimitri is a sophomore in Branford College. You can contact him at dimitrios.lippe@yale.edu.