The Evolution of the Greek Economy

Past Challenges and Future Approaches

Panagiotis E. Petrakis, Pantelis C. Kostis

• Publisher: Palgrave Macmillan
• Year: 2020
• Print ISBN:
  9783030472092
• eBook ISBN:
  9783030472108
• Topic: Economics
• Subtopic: International Business
• Index: Economics

This book assesses the current state of the Greek economy and detects its development and growth prospects up to 2030. The analysis begins with 19th century Greece, addressing the repeated defaults that led to the formation of a dependent state, and the failed modernizing attempts. Then the book addresses current geostrategic dimensions as well as the current structure of institutions and culture in Greece. The second part presents the evolution of sustainability, governance, and inclusivity, as well as the evolution of culture in Greek society and insights into the production prototype. The third part of the book looks forward to what lays ahead for Greece up to 2030. It presents the theoretical background for two scenarios: the normal scenario (business as usual, including the effects of the recent Covid-19 pandemic) and the optimal scenario (a pro-growth scenario including increases of Total Factor Productivity through structural reforms). In presenting these scenarios, the book discusses issues ranging from a comparative analysis between Greece and the Eurozone, the developments in output gap and potential output, public debt, competitiveness, basic macroeconomic variables, a detailed analysis on investments, and inclusive growth.

Part IThe Evolution of Economic History, Institutions and Cultural Background

© The Author(s) 2020

P. E. Petrakis, P. C. KostisThe Evolution of the Greek EconomyThe Political Economy of Greek Growth up to 2030https://doi.org/10.1007/978-3-030-47210-8_1

Begin Abstract

1. A Brief Economic History of Repeated Defaults

Panagiotis E. Petrakis¹ and Pantelis C. Kostis¹

(1)

Department of Economics, National and Kapodistrian University of Athens, Athens, Greece

Panagiotis E. Petrakis

Email: [email protected]

The authors would like to thank Dr. Konstantinos Loizos for his contribution to this chapter.

End Abstract

1.1 Introduction

Our era is characterized by a globalized economic environment. The concept of debt (public or private) reflects the promise of payment on the part of the debtor and the risk that the lender undertakes this promise not to be realized. Debt means interdependence, often one-sided, either to one or the other part. On the one hand, the credit risk assumed by the lender is directly related to both the economic conditions of a country and its institutional environment as it has been formed historically. This risk, together with the risk of strategic bankruptcy of the debtor, constitute a form of dependence of the lender on the debtor. On the other hand, the loan agreement contains the element of the debtor’s dependence on the lender to the extent that it specifies the way of imposing its terms and implicitly includes the threat of non-renewal of financing in the event of an inability to repay. This dependence takes a more dramatic form when it comes to the debt of sovereign states. In any case, the enforcement of the terms of a contract and the protection of both parties is associated with the existence or the deficiency of the necessary institutional environment to ensure compliance.

In this sense, the credit risk for the lender and the risk of non-access to future financing for the debtor, become an institutional risk that affects both parties and reflects the characteristics of the political economy of the development of a particular country. This risk is not static but it is a concept with primarily historical characteristics as it is subject to changes and fluctuations during time.

From the emergence of the Greek national movement, which in 1821 led to the revolution of the Greeks against the Ottoman Empire in order to establish an independent state which was recognized in 1830, until today, Greece faces a history of repeated defaults. A key feature of the modern history of Greece is the conclusion of loans of large amounts on strict terms that have resulted for all these years into a state of high dependence of the Greek economy from its lenders.

In this chapter, the repeated defaults episodes of the Greek economy from 1827 to the present are initially presented (Section 1.2), while in sect. 1.3 the fact of the high dependence of the Greek economy on the large economies that lend it over time is presented.

1.2 The Defaults

One could, in many ways, describe the history of modern Greece as an economic history of repeated episodes of defaults which are, in fact, closely linked to its external debt. In the development of the Greek economy, at least five of the most important defaults of the modern Greek state (Reinhart & Trebesch, 2015; Dertilis, 2014, p. 37) stand out: (1) The default of 1827 which took place during the national liberation struggle and only four years before the modern Greek state was recognized by The Great Powers of the time. (2) The default of 1837–1838 and 1843–1844. (3) The default of 1893 which coincided with the raisin crisis. (4) The announcement of suspension of payments of 1932 which took place in the aftermath of the Great Depression of 1929 and the banking crisis of 1931 and just a few months after the British pound abandoned the gold standard. (5) Finally, the recent (not officially recognized) default of 2010–2012, which once again took place immediately after an event with significant international implications such as the crisis that began with subprime mortgages in the USA and developed in the financial crisis of 2007–2008.

The default of the 1820s concerned two major loans contracted by the provisional revolutionary government to finance the Greek War of Independence. These loans were concluded on particularly onerous terms. Specifically, out of loans totaling 2.8 million English pounds, only 1.3 million eventually reached the hands of the Greek side and this was because these loans were issued at less than 60% of their nominal value while the various brokerage costs and commissions were particularly high (Reinhart & Trebesch, 2015). This, however, was not a Greek distinctiveness, but seems to have been a common practice in the City of London for loans to foreign governments inasmuch as the temporary revolutionary government was recognized as such by foreigners. Indeed, all loans of this kind contracted in the London Stock Exchange between the years 1822 and 1825 were issued at high rates of discount as the rates of issue ranged from 58% the lowest to 91.5% the highest. The former concerned a loan to Mexico while the latter was a loan received from the state of Naples. The discount rate of the Greek loan was, in fact, the second highest (Andreadis, 1904, p. 16). These Greek loans were of absolute necessity given the desperate situation in which the finances of the Provisional Revolutionary Government were. The regular revenues of the government were extremely uncertain, covering only a third of the regular expenditures. It should be noted that half of this revenue came from Crete, which was quite far from the main theater of operations of the War of Independence. Unfortunately, however, the conclusion of the loans coincided with the outbreak of an internal political conflict which eventually resulted to the first civil war (1824–1826) (Andreadis, 1904, pp. 14–15). The terms of the first loan included a capital of 800 thousand English pounds, a repayment period of 36 years and an interest rate of 5%. The Greek provisional government offered the lenders its revenues as collateral for the repayment of the interest on the loan and national land as collateral against the principal of the loan. However, due to the issue price at 59%, the actual borrowed capital was only 348.8 thousand English pounds after deducting advances on principal repayment and interest plus commissions. The second loan had a face value of two million English pounds, and the contract was signed in 1825. However, the loan’s 200,000 bonds were issued at a price of 55.5% of their nominal value. The final amount of the loan was reduced to 816 thousand English pounds after deduction of advances and commissions (Andreadis, 1904, pp. 15–24). However, unfortunately neither of these two loans was used as effectively as expected to finance the conduct of the war. Part of the funds of the second loan never arrived in Greece because it was used to repurchase bonds of the first loan. The portion of the loan allocated to build warships had not the expected results. What remained of the two loans was eventually used to finance the civil wars of the revolution (Andreadis, 1904, p. 19, 49–50).

Eventually the revolutionary government declared suspension of payments in 1826 which lasted until 1878, while the country regained access to capital markets again in 1879 (Reinhart & Trebesch, 2015; Petrakis 1992, pp. 38–39). Meanwhile, various negotiations have taken place in order the two sides to reach an agreement on debt settlement, which were, however, interrupted by periods of political instability and disagreement. However, the newly established, which inherited a destroyed production base due to the war of Independence, desperately needed a new loan to cover its current expenses (Andreadis, 1904, pp. 75–76). Finally, for political reasons, the three Great Powers (France, Great Britain, and Russia) who agreed to Greek Independence, accepted to guarantee a new loan of 60 million francs. This loan would be drawn from the international capital markets but the agreed amount would be paid to Greece under specific conditions, among which was for the country to put its public finances in order (Reinhart & Trebesch, 2015; Andreadis, 1904, pp. 78–80). The agreed interest rate of the loan was 5% and the repayment would have to be within 36 years. Only one-third of the loan was finally used to cover the financing needs of the Greek state, while the remaining two-thirds were devoted to the repayment of principal and interest on previous loans as well as to cover other expenses. Additionally, of this one-third, about half were paid by the Greek state to Turkey for the purchase of the province of Fthiotis, while the rest financed the expenses of the army and the Bavarian Regency (Andreadis, 1904, pp. 83–86). The loan was concluded in 1833 but the Bavarian administration declared suspension of payments in 1838 and 1843. (R...

Table of contents

• Cover
• Front Matter
• Part I. The Evolution of Economic History, Institutions and Cultural Background
• Part II. The Evolution of Sustainability, Governance, Inclusivity, Culture and Economic Growth in the Greek Economy
• Part III. The Long-Term Evolution of the Greek Economy
• Back Matter