Saturday, August 08, 2015


It is a commonplace that the 1821 revolution secured Greece’s independence. What is generally not known however, is that the independent state of Greece, was set up for financial failure from its very outset. In 1824, a loan of £472,000 pounds was secured on the London Stock Exchange to finance the campaign for Independence. 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 was floated in 1825. Sadly, speculators and middlemen in London skimmed off much of the proceeds before Greece received any funds. Further, the Greek War of Independence soon descended into civil war between rival factions, rendering it impossible to determine 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 was not until 1878 that the Greek government was able to settle on the loans, which by then with accrued interest had increased to over £10 million.

 After the European powers recognized Greece’s independence, in 1832 and appointed Otto of Bavaria as its first king, another loan totaling 60 million drachmas was given to Greece. 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. It was also intended to fund Otto’s Bavarian army, which would be brought with him to Greece. In Greece, Otto found himself mediating between factions that all believed they had a stake in government and the public purse and all of which served the interests of one or the other of the guarantor powers of Greece’s independence. Solvency became an issue almost immediately.

 As Lucien Frary relates in his recently published: “Russia and the Making of the Modern Greek Identity, 1821-1844,” On 29 December 1842, Greek Foreign Minister Iakovos Rizos-Neroulos informed the ambassadors of Britain, France and Russia that even though the government and the royal household had decreased their expenditures significantly, Greece would be unable to pay the service charge on the 60 million franc loan it had contracted, due in March of that year. As a result, he petitioned the foreign powers for a bailout, in the form of a new loan to cover the interest repayments. The Russian ambassador, Konstantinos Katakazis, replied a week later that such a request was against the London convention of 1832. Writing to his counterpart in Constantinople, Katakazis commented: “This unpleasant phase of the Hellenic question will perhaps bring some sort of denouement to the interior affairs of the country and the course of its government. For it is impossible for me to suppose that the cabinets will decide to grant a loan again without asking King Otto and his councilors for an account of all the expenditures that they have made during the last ten years and the millions they have received.”

Russia was the first of the protecting powers to respond to the financial troubles by informing the Greek government that St Petersburg would bail it out by covering the interest charge due in March of that year. This news, according to Vice-Consul Kallogerakis in Patra, was met with jubilation by the inhabitants of Greece. He wrote: “The peasants repeatedly blessed the name of the August Sovereign of Russia.” Soon afterwards, Russian Foreign Minister Nesselrode wrote to the Greek government demanding payment of the service charges by June. Nesselrode insisted that the Greek government must try to achieve the payment by making huge cuts to public expenditure and introducing austerity measures. The problems of Greek finances, the Russian foreign minister observed, were due to bad government, inefficient administration and an unnecessarily large military.

 Measures were taken, but bad harvests and a downturn in the world economy exacerbated Greece’s woes.

 Since the Greek government was not able to pay the service charges on the loan, it faced the threat of the foreign powers intervening. The only way forward was to attempt to raise revenue while continuing to pare down the expenses of the state. Otto agreed with his ministers to increase taxes, impose a levy on public servants, eliminate selected diplomatic postings and lessen the pensions of priests. Fatally, the government also reduced the army by 1,200 men and agreed to remove the remaining Bavarians still embedded within the state apparatus. Greek Minister Rizos wrote to Nesselrode expressing regret that Russia doubted Greece’s efforts to develop the resources of the country and reduce public expenses. He illustrated all actions taken to improve the budget and pointed out that the cutbacks had serious repercussions on public morale, as a large sector of the population were dependent upon the state for their livelihood and increased austerity could destabilize the king. In particular, hoplarchs who had fought in the Revolution began to foment dissent, as their livelihoods were threatened owing to the cutbacks in the military.

 After browbeating the Greek government, the troika of Russia, Britain and France determined the solution to Greece’s financial woes at the Conference of London in July 1843. The Greek government was compelled to sign a protocol reducing its budget, even though the proposed economies were insufficient to meet the annual interest and amortization of the bailout package.

 Eventually, Greece not only defaulted on its loan but also had a constitutional revolution. The Greek cavalry, whose budget was cut in some cases by two thirds, while the Bavarian officers received no cut to their budget or salaries, staged a revolt let by Colonel Kallergis, in which they compelled Otto to grant the country a constitution. With the country in chaos, the economy also was unhinged.

 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.

 What emerges as a common theme between the 1843 crisis and the crisis of today is while reform is necessary and the viability of Greece as a state and economy is of paramount importance, in both situations, such reforms as were imposed by the great powers and their bankers upon Greece were not motivated by these considerations but rather simply, by securing the means by which Greece should discharge its indebtedness to those powers, regardless of the human or political cost, or the detrimental effect this would have on the development of Greece. In the case of 1843, this caused a violation of sovereignty and contributed to the contraction of impossible loan after impossible loan that led to Greece’s bankruptcy on a few occasions, political instability and chaos and a good deal of suffering. If the 1843 crisis and its resulting political revolt it caused is anything to go by, the worst, with regards to the political fallout of the current ‘bailout,’ is not yet behind the Greek people.

First published in NKEE on Saturday 8 August 2015