Search for

No matches. Check your spelling and try again, or try altering your search terms for better results.


Oct 28, 2011 | 11:50 GMT

8 mins read

Greece's Continuing Cycle of Debt and Default

Greece is no stranger to economic crises such as the current one. The country has been in debt since its independence and has gone through a cycle of borrowing and defaulting numerous times. Foreign powers have always had an interest in maintaining Greece's stability, so previously they always agreed to refinance its debts. The only new factor in Greece's ongoing crisis is that the country is not as strategically important to outsiders as it was before the end of the Cold War, so foreign governments are not as interested in loaning Athens money.
The ongoing financial crisis in Greece is a familiar situation for Athens. Greece has been in debt since its war for independence from the Ottoman Empire in the 1820s, which means international creditors and foreign sponsors have played a role in Greek finances, politics and economic development since then. Even though Greece has failed to achieve the expected gains from the reforms its Western creditors have demanded it make in order to pay back its loans, foreign powers have always had a strategic need for Greece and have thus refinanced or forgiven its debts despite numerous defaults.

Indebted from the Start

The modern state of Greece was born after 11 years of fighting against the Ottoman Empire (from 1821-1832). However, it was not until Western intervention in 1827 that the conflict turned decidedly in Greece's favor. The war had disrupted commerce in the Eastern Mediterranean, and France and the United Kingdom were concerned that a power vacuum in the region would give the Russian Empire an opportunity to expand and gain direct access to the Mediterranean. They thus sought to balance any expansion of Russian power by positioning themselves strongly in a newly independent Greek states. When Greece finally achieved its independence, it was these three Great Powers — France, the United Kingdom and Russia — that negotiated the terms of that independence. Despite the nationalist origins of the Greek conflict, the Treaty of Constantinople — negotiated by the Great Powers in 1832 — declared the Kingdom of Greece an absolute monarchy and appointed a Bavarian prince, Otto, as monarch. Since the 17-year-old Prince Otto was a minor when he was named monarch, a council of regents consisting of three Bavarian advisers who came to be known as the "Troika" — incidentally, the same term used for the International Monetary Fund (IMF), European Central Bank and European Union officials today — were appointed to rule in Otto's name. One member of the Troika was particularly instrumental in establishing the framework for the new country: former Bavarian Finance Minister Josef Ludwig von Armansperg, who ultimately was appointed prime minister of Greece when Otto assumed the throne. During the fight against the Ottomans, Greece accumulated a large external debt — a debt on which it defaulted in 1826, greatly restricting the new country's ability to access international credit. The United Kingdom, France and Russia agreed to loan the new country 600 million francs. As a condition of the loan, the three countries maintained diplomatic representatives in Athens who were heavily involved in the creation and oversight of the Greek government. The Great Powers wanted to see immediate returns on their loans after the new country began taking shape. However, the only immediate source of internal revenue for Greece was agriculture. Loans were given to farmers to expand cultivation on land that was nationalized after the war. The financing terms of the state loans, which required a 3 percent down payment in cash, combined with an immediate and heavy tithe on the lands' production, forced most agriculture laborers to borrow from the few private individuals who had access to large amounts of capital — mostly the wealthy members of the Greek diaspora and the merchant class. This created a cycle of debt wherein the state's attempts to pay off its international debt resulted in an increasingly indebted population.

The Cycle Continues

Greece's economic growth stalled altogether in the 1870s. The country's limited success at servicing its external debt continued to prohibit it from accessing international credit markets and threatened to spark an income crisis for the state. However, Greece's strategic importance again prompted Western intervention to stave off a financial crisis for another couple of decades. The accelerated decline of the Ottoman Empire and the emerging power vacuum in the newly independent Balkans drew the attention of the Western European powers hoping to use their relationship with and influence over Greece to counter the expansion of Russian or Austro-Hungarian power in the region. Immediately after the 1878 Berlin Congress, the United Kingdom, France and Germany wanted Greece to increase its military development and become a stronger force in the Balkans. The three countries agreed to act as intermediaries between the Greek state and foreign creditors to facilitate additional international loans and successfully negotiated several large foreign loans for the country. Greece used some of the credit for defense spending but also built a large public debt that went primarily toward servicing its pre-existing debt. Then, in 1893, Greece defaulted. Athens had too little political authority at home or abroad to negotiate on its debt and thus had to surrender its economic development and fiscal authority to an International Financial Control Committee run by representatives of foreign bondholders — the United Kingdom, France, Germany, Italy, Russia and Austria-Hungary — which imposed strict fiscal discipline. This committee administered Greece's monetary and fiscal policy for the first decades of the 20th century. Under this supervision, Athens made progress in rationalizing its budget, reforming its banking system and making other changes. However, despite this progress, little structural economic growth occurred over this period; the institutors of the reforms were more concerned with recouping payment on their loans than with developing Greece's economy. Very little money was used to invest in the development of badly needed infrastructure, such as roads, that would connect the cereal-producing regions of continental Greece with the domestic markets of the populous coastal cities. Despite the annexation of Thessaly in 1881, which provided Greece with enough cereal production to be self-sufficient in wheat, the country remained a net importer of wheat until after World War II because it was far cheaper for coastal populations to import the grain from foreign producers in the Mediterranean basin. The combined effects of the First and Second Balkan Wars, World War I, the Greco-Turkish War and the Great Depression were too much for the Greek economy. Additionally, the International Financial Control Committee's authority weakened greatly after the outbreak of World War I, as representatives from both Allied and Central Powers were tasked with administrating the committee. Greece defaulted again in 1932. By the end of World War II, Greece, along with its European sponsors, was in economic ruins. In March 1947, the United Kingdom had to end the financial assistance it had provided Greece in varying degrees since the 1820s. However, the Communist insurgency that engulfed Greece immediately after World War II once again presented the threat of Russia (now the Soviet Union) controlling strategic points in the Eastern Mediterranean. This made Greece strategically critical to the single remaining Western superpower: the United States, whose military and economic aid to Greece during the Cold War prevented Communist forces from gaining influence in the country. In 1981, Greece became the 10th member of the European Economic Community (the predecessor of the European Union). After this, Greece received large loans and subsidies from the European bloc in addition to aid from the United States. Nonetheless, by the early 1990s, Greece's lack of economic growth and massive budget deficit led the IMF and European Commission to supervise the country's finances.

A Familiar Position for Athens

Greece's current problems — a large external debt, high defense expenditures, a political system entrenched by its ability to provide its supporters with continual patronage, a capital-poor and import-dependent economy, an ineffective tax collection system, exclusion from international credit markets and the forfeiture of its fiscal sovereignty to external creditors — are problems Greece has faced throughout its modern existence. It has been in major powers' strategic interest to ensure Greece's stability since its independence from the Ottoman Empire, but it seems that nearly 200 years of international interest in developing the Greek economy has not done much to change Greece's circumstances. It is unclear how important European or other foreign powers presently consider preventing major economic, political or social instability in Greece. The financial and political price of preventing the country's economic collapse — and the potential dissolution of the modern European system — has grown vastly since the beginning of the crisis in 2008, yet not a single party has decided to cut its losses and walk away. For better or worse, Greece is integrated into the European system, and its failure would have repercussions on the system. If European leaders believe the preservation of Greece is key to preventing their own economic demise, then perhaps Greece has not lost its strategic value to the West after all. However, that remains to be seen.

Article Search

Copyright © Stratfor Enterprises, LLC. All rights reserved.

Stratfor Worldview


To empower members to confidently understand and navigate a continuously changing and complex global environment.