Academic journal article Brookings Papers on Economic Activity

The Pitfalls of External Dependence: Greece, 1829-2015

Academic journal article Brookings Papers on Economic Activity

The Pitfalls of External Dependence: Greece, 1829-2015

Article excerpt

ABSTRACT Two centuries of Greek debt crises highlight the pitfalls of relying on external financing. Since its independence in 1829, the Greek government has defaulted four times on its external creditors--with striking historical parallels. Each crisis is preceded by a period of heavy borrowing from foreign private creditors. As repayment difficulties arise, foreign governments step in, help to repay the private creditors, and demand budget cuts and adjustment programs as a condition for the official bailout loans; political interference from abroad mounts, and a prolonged episode of debt overhang and financial autarky follows. We conclude that these cycles of external debt and dependence are a perennial theme of Greek history, as well as in other countries that have been "addicted" to foreign savings. At present, there is considerable evidence to suggest that a substantial haircut on external debt is needed to restore the economic viability of Greece. Even with that, a policy priority for the country should be to reorient, to the extent possible, toward domestic sources of funding.

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The history of Greece is a narrative of debt, default, and external dependence. In 1952, the Greek-Canadian historian L. S. Stavrianos noted that since their independence, "the Greek people have had to bear a crushing foreign debt that has literally sucked their lifeblood" (Stavrianos 1952, p. 25). This graphic statement could well have been written 60 years later, in 2012, when Greece was in the midst of its fourth sovereign debt crisis. Or it could have been written 60 years earlier, on the eve of the second sovereign default. This paper documents the recurring patterns of sovereign default in Greece with the aim of gaining insights into possible solutions to the current crisis.

Our main conclusion is that the composition of Greek sovereign debt (external versus internal), and not just its levels, played a central role in explaining the country's historical default episodes, as well as its current predicament. Over the past 200 years, the tilt toward foreign borrowing in Greece (by the public and private sector) has resulted in repeated crises and sudden reversals (stops) of capital flows. We highlight that the consequences of the boom-bust cycles in external borrowing were not only economic, but political as well. The defaults resulted in prolonged bouts of heavy political interference from abroad, mainly aimed at assuring the repayment of bailout loans. The events since 2010 are neither new nor unique in Greek history.

There are relatively few papers on the unfolding Greek crisis that take a longer historical perspective. In this paper, we focus on Greece in the long-run, though our data and archival work is part of a much broader research agenda on the history of sovereign lending, default, and haircuts, which covers all debtor countries over the past 200 years (see Meyer, Reinhart, and Trebesch [ongoing work]).

The evidence we present reveals striking historical parallels between the past and the present. Most surprising are the close similarities in the crisis resolution process. For example, we find that Greece has been bailed out many times before, coupled with heavy conditionality and externally imposed adjustment programs. We also find that earlier Greek defaults have been similarly protracted, and that much of the bailout money was used to service old privately held debt. In each crisis, the country's external creditors (both official and private) initially refused to accept haircuts, but agreed to them eventually, sometimes after decades of fruitless negotiations and failed interim agreements. These insights speak to the current debate on how to address Greece's current debt overhang.

More generally, the role of external versus domestic borrowing remains comparatively understudied in connection to economic crises. Carmen Reinhart and Kenneth Rogoff (2009) take up this theme when discussing the literature at large. …

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