Reinhart and Trebesch: “The pitfalls of external dependence. Greece 1829-2015”. How to loot and weaken a state.
In 1833 the young Greek state was bailed out for the first time. Greece could not pay the loans taken on even before Greece was an independent state anymore. Remarkably, the state-to-be had received not even half of this money as, aside from high fees, there was a 40% haircut on the money Greece received. See p. 13 of a new paper by Reinhart and Trebesch, The pitfalls of external dependence, Greece 1929-2015, on the history of the four to six bail outs of Greece. The total sum of the 1833 bail out loan (financed by governments and which in fact bailed out private creditors, not Greece) was 45,5 million gold Drachme. Five million went to the Rothschild bank, as a fee. Another 7,6 million did not go to the Greek government but to the lenders as an interest advance for 1833 and 1834. Greece had to pay interest on a loan used to pay interest in advance. And the rest of the money? According to Reinhart and Trebesch, this is what happened:
Fees to the House of Rothschild 5 million
Interest on loan for 1833-1835 (advanced) 7.6 million
Compensation to Ottoman Empire 12.5 million
Debt repayment to Great Powers (advanced) 2 million
Travelling expenses for King Otto, his personnel and escort 2.1 million
Wages and other expenses for members of Otto’s regency 2 million
Recruitment and moving costs for Bavarian Voluntary Corps 3.3 million
Purchase of military supplies 1 million
Subtotal 35,5 million
Remainder transferred to Greek Public Treasury 9 million
Creditors looting and weakening a state to enhance their income – the Dijsselbloem doctrine avant la lettre. One fact Reinhart and Trebesch point out is the fickle and dangerous nature of international flows of capital. Don’t borrow abroad, borrow at home (which isn’t really possible anymore, in the Eurozone). Another one:
Sovereign defaults on external creditors can take painfully long to resolve (see Table 2). The Greek experience shows that crises can also be very protracted when foreign governments step in and arrange bailout programs, as was the case in the guaranteed Greek loan of 1833. It started out as a loan from private creditors, which Greece could not repay. The 1833 Troika (France, Great Britain and Russia) repaid the private creditors and Greece’s debts shifted to official hands. After decades in default and financial autarky, Greece still faced repayment of that loan more than 100 years later. Such a crisis resolution approach, which results in decades of debt overhang, perpetuates external dependence and impedes a “fresh start” for the over-indebted country.
We have documented elsewhere that protracted debt crises are typically resolved only after creditors agree to face value haircuts (Reinhart and Trebesch 2015). Decisive debt relief is associated with higher subsequent growth that softer forms of debt relief, such as maturity extensions, do not usually deliver. A modern example is the Brady deals of the 1990s, which involved nominal debt reduction and successfully ended the “lost decade” in many developing countries. In contrast, the Baker deals of the 1980s, which extended maturities, were, in retrospect, a failure for both debtor countries and US taxpayers. Against this backdrop, a key ingredient in the resolution to the ongoing Greek crisis is a deep nominal haircut on the stock of official (and possibly private) external debt.