Greece is at the center of the sovereign debt crisis that is worrying many investors and increasing the volatility of stock markets across the world. This is not a new phenomenon for that country, which has defaulted on its external debt many times since achieving independence at the beginning of the 19th century. Here are some facts that all investors should know about the history of Greek sovereign debt defaults.
TUTORIAL: Bond Basics: Characteristics
The first recorded default in Greek history occurred in the fourth century B.C., when 13 Greek city states borrowed funds from the Temple of Delos. Most of the borrowers never made good on the loans and the temple took an 80% loss on its principal.
Greece has defaulted on its external sovereign debt obligations at least five previous times in the modern era (1826, 1843, 1860, 1894 and 1932). The first episode occurred in the early days of that country's war of independence, and the last default was during the Great Depression in the early 1930s. The combined length of period under which Greece was in default during the modern era totaled 90 years, or approximately 50% of the total period that the country has been independent. (For related reading, see Recession and Depression: They Aren't So Bad.)
Although many might consider this level of default to be excessive, Greece is nowhere even close to the top of the list. Venezuela and Ecuador, with 10 defaults each, share the (dis)honor of being the greatest serial defaulters of the modern era.
Greek War of Independence
The Greek War of Independence began in 1821 and targeted the end of Ottoman authority, which had ruled most of that region for centuries. In 1824, a loan of 472,000 pounds was secured on the London Stock Exchange to continue this fight. This offering was oversubscribed and buyers were required to put down only 10% of the purchase price with a promise to pay the balance over time. An additional loan of 1.1 million pounds was floated in 1825.
The unfortunate fact about these two loans was that speculators and middlemen in London skimmed off much of the proceeds before Greece received any funds. Another issue was that the Greek War of Independence soon descended into civil war between rival factions, making it difficult to even figure out who should receive these funds.
No interest payments were ever made to the bondholders on these two loans, and the value of the paper eventually plummeted to a fraction of the par value. It wasn't until 1878 that the Greek government settled on the loans, which by then with accrued interest had increased to over 10 million pounds.
Loan of 1832
In 1832, another loan totaling 60 million drachmas was given to Greece, which was officially an independent sovereign nation. The loan was arranged by the French, Russian and British governments, and was ostensibly given to help Greece build its economy and manage the initial stages of governance.
The funds were mostly squandered on the maintenance of a military and the upkeep of Otto, a Bavarian prince that was made King of Greece by the English. Greece managed to stay current on this loan until 1843, at which time the government stopped payments.
After this default, Greece was shut out of international capital markets for decades. During this interregnum, the government became dependent on the National Bank of Greece for borrowing. The government's needs were modest at first but soon escalated and the National Bank of Greece provided funds at interest rates that were twice the international lending rate. (For related reading, see Get To Know The Major Central Banks.)
After the Greek government settled outstanding defaults in 1878, the global capital markets opened once again to Greece and, as you might expect, lenders were only too eager to provide funds. This borrowing increased to unsustainable levels and the government suspended payments on external debt in 1893.
In 1898, foreign pressure led Greece to accept the creation of the International Committee for Greek Debt Management. This committee monitored the country's economic policy as well as the tax collection and management systems of Greece.
In the early 1930s, many countries defaulted on sovereign debt obligations as the world economy contracted and entered what became known as the Great Depression. Greece imposed a moratorium on paying on its outstanding foreign debt in 1932. This default lasted until 1964, the longest of any of the country's five defaults. One interesting historical anecdote is that Eleftherios Venizelos was the Greek Prime Minster that defaulted on Greece's sovereign debt in 1932.
Evangelos Venizelos, the current Greek Deputy Prime Minister and Minister of Finance, is at the center of current crisis and heavily involved with negotiations with the European Union. The two are not related, however, and there is even unsubstantiated speculation that he changed his name to Venizelos to gain political advantage. (For related reading, see The Italian Crisis.)
The Bottom Line
The history of the Greek financial system is not encouraging to those investors that are hoping that this country avoids defaulting on its sovereign debt obligations. Some may take comfort in knowing that while previous defaults were dislocating to the market, the global financial system did not suffer any long term damage because of these events.
EconomicsAfter the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
EconomicsWe share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
EconomicsFor every major world event, there are those who stand to lose and those who stand to gain. A look at the short, medium, and long-term impacts of the Paris attacks.
Investing NewsThe horrific terror attacks in Paris will have a ripple effect on comsumer spending and tourism.
EconomicsSee which major world economies haven't recovered from the global recession in the early 21st century, including a long-stagnant industrial power in Asia.
EconomicsLearn about the origins and economic factors that led to the downfall of the Puerto Rican economy and what the U.S. government can do to fix the situation.
Investing NewsBritain is edging towards leaving the EU according to polls that show the UK's future membership of the EU is uncertain.
InvestingA weaker euro is boosting German exports, which have led to a record trade surplus. Here are five German companies reaping the benefits.
EconomicsThe European Central Bank's quantitative easing program aims to save a heterogeneous Eurozone with liquidity for widespread investment.
InvestingThe Fed’s continued delay has repercussions for more than just the U.S. economy and markets. The ECB and the BoJ may support the case for stocks in Europe.
Greece is a developed country by most meaningful metrics. However, its financial struggles have been well documented in the ... Read Full Answer >>
In 1992, the Congressional Budget Office conducted an economic study on value-added tax, or VAT. At the time, the CBO concluded ... Read Full Answer >>
Debt securities are a form of loan from an investor to the government or a business. Among the many different types of debt ... Read Full Answer >>
Broadly speaking, there are three types of austerity measures. The first is focused on revenue generation (higher taxes), ... Read Full Answer >>
The primary advantages for a company of listing on the Nasdaq exchange are lower listing fees and lower minimum requirements ... Read Full Answer >>
Austerity policies are intended to reduce government debt and bring stability to that nation's economy. Austerity's effectiveness ... Read Full Answer >>