In Greece, history does not rhyme but it repeats itself
From: Sophia Lazaretou (2003), ‘Greek monetary economics in retrospect. The Adventures of the Drachma‘. Bank of Greece working paper no. 2
Starting from 1886, the government relied on large-scale foreign borrowing to finance the budget deficits. During this period the Greek governments were able to raise foreign loans on favourable terms for the implementation of infrastructure projects. After the avoidance of the economic crisis of 1884-85 and the contract of a large foreign loan in 1887 (91 million gold French francs), the country’s credit-worthiness in international money markets was enhanced. From 1889 and onwards, foreign creditors willingly provided the Greek governments with long-term loans with small or no pledges and at a low interest rate. This was because they considered the suspension of the drachma’s convertibility in 1885 as a temporary and extraordinary incident, and expected that the government would soon take anti-inflationary policy measures as it had done in the past. Nevertheless, the high level of primary expenditures and, more importantly, of expenditures for the repayment of the outstanding domestic debt, and their financing through foreign borrowing, created high interest payments, which perpetuated fiscal deficits … In 1890 the country’s reputation as a debtor began to suffer. The impending bankruptcy of Portugal in Europe and of Argentina in Latin America, as well as the crisis of the US dollar, worried foreign creditors who, until then, were generously supplying loans to developing economies without any guarantee and at low interest rates. In December 1893, the government unilaterally suspended payments on servicing the external debt. Foreign creditors demanded the presence of foreign experts for the monitoring of the economic policy pursued and, especially, of the tax collection and management systems. This demand was seen as a pre-condition for the government to pursue a monetary and fiscal policy, which would ensure both the regular repayment of the foreign debt, as well as its repayment in drachmas convertible to gold at par value. After her humiliating defeat in the Greco-Turkish war of 1897 and the resulting huge war indemnity she had to pay to Turkey, Greece was forced to accept the presence of the International Committee for Greek debt management. 1898 was the beginning of a period of intensive disinflation. Successive Finance Ministers curtailed expenditures and increased indirect taxes in an effort to balance the budget. Public confidence in the currency was restored, since private agents knew that the government lacked monetary freedom. Large gold inflows occurred and the drachma came under strong revaluation pressure vis-à-vis the French franc. In 1909, the initial parity of 1:1 was achieved and in March 1910 the drachma joined the gold standard.