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The current negotiations between Greece and its creditors recall a specific precedent, when an exhausted country decided to reduce its burden but was ultimately forced to resume it under heavy international control.

Greece repeatedly failed to respect its commitments to creditors in the tumultuous first decades of independence from the Ottoman Empire. In 1878 it managed to re-negotiate its obligations and conclude pending controversies, regaining access to international financial markets. During the 1880s interest rates were low and Greece borrowed especially in France and the UK to fund modernization, including infrastructure investment and also military spending. Economic growth however did not pick up, and in 1892 a new international depression started, the price of Greek exports declined and French protectionism hit Greek exports.

As a consequence Greek government debt increased from 50% of GDP in the early 1880s to 162% in 1893 and 217% in 1894. The deterioration of public finances and the issue of inconvertible paper money contributed to the depreciation of paper drachme in terms of the gold currencies of the other members of the Latin Monetary Union (primarily France) by up to 60%, making servicing foreign debt in gold even more expensive.

In 1893 Greece suspended payments on its foreign debt, whose cost had reached 33% of Greek government income. A new loan was floated in London through Hambros to face what initially seemed a temporary problem, but then further depreciation of the drachma made the situation unsustainable and Greece announced a unilateral reduction by 70% of its interest payments. Long negotiations started with foreign bondholders without any agreement for several years.

The situation was unlocked in 1897, against the interests of Greece, because of a new war with the Ottoman Empire for Crete, ending with a Greek defeat. The Greek government was forced to ask for the help and mediation of the Great Powers to stop the advance of the Turks towards Athens. The mediation was successful but part of the agreement included that Greece would restart payments to foreign investors, and would accept international control over Greece and a heavy war indemnity in favour of Istanbul.

In 1898 the International Committee for the Management of Greek debt was created. Foreign experts monitored Greek economic policy to ensure its budgetary soundness and its compatibility with servicing foreign debt. Some components of Greek tax income were dedicated directly to foreign bondholders, in particular customs duties. Greece restarted paying its debt in gold, with lower interest rates. The new bonds were issued under the joint guarantee of the great powers (France, UK and Russia), with a text printed in Greek, French, English and Russian, here illustrated.

Luca Einaudi, Centre for History and Economics