Greece's Tragic Past of Defaults; City FOCUS

Article excerpt

Byline: Simon Duke

IT INVENTED democracy, revolutionised our notions of ethics and justice, and laid the foundations for modern science, mathematics and music.

Civilisation, as we know it, would be poorer and meaner were it not for Hellenic Greece.

But amidst this proud legacy lies a dirty little secret.

The ancient Greeks also taught the world a bitter lesson in economics: that debts are not always re-paid.

The first ever sovereign default occurred in the fourth century BC when ten city states in the Attic Maritime Association reneged on loans given by the Temple of Delos, the mythical birthplace of Apollo.

Since then, Athens has repeatedly failed to pay back its loans. According to economists Carmen Reinhart and Kenneth Rogoff, the nation has spent 50 of the past 200 years in default.

Creditors, with their eyes ever trained on a fast buck, have manifestly failed to learn from the mistakes of the past.

And so, nearly two and a half millennia later, Greece stands on the precipice of the biggest ever debt default, and the first by a developed nation since Germany in the Second World War.

That Greece will have no choice but to reduce its debt millstone has become abundantly clear.

Its [pounds sterling]305bn of outstanding loans amounts to more than 160pc of annual economic output.

This is more than twice the equivalent size of Russia's and Argentina's obligations when they defaulted in 1998 and 2001.

At the weekend International Monetary Fund meeting in Washington, eurozone officials privately acknowledged that the burden would have to be halved if Greece is to stand a fighting chance of ever emerging from the economic mire.

However a 'haircut' of that magnitude is likely to create gigantic holes in the balance sheets of banks that carelessly loaned money to profligate Greece.

There are growing fears that these impending losses could accelerate the flight from the debtladen peripheral nations, such as Spain and Italy, and see European lenders frozen out of wholesale money markets altogether.

A full-blown eurozone banking crisis could ensue, creating levels of pandemonium not seen since the collapse of Lehman Brothers in 2008.

For this reason, European leaders are scrambling to prevent a crisis that has already overwhelmed Athens, Dublin and Lisbon from crashing through the gates of Rome. The outline of an emergency package to draw a line once and for all under the crisis is beginning to take shape. …