The pitfalls of external dependence: Greece, 1829-2015

MEDIA SUMMARY

Greek debt tragedy replays itself over centuries; Always results in eventual default
Since independence nearly 200 years ago, Greece has been bailed out and defaulted 4 times

Greece has a nearly 200-year history of relying on external creditors for financing, only to later default after a period of heavy borrowing from foreign private creditors, and then 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. In “The Pitfalls of External Dependence: Greece, 1829-2015,” Carmen M. Reinhart of Harvard University and Christoph Trebesch of the University of Munich note that debt crises can be very protracted when foreign governments step in and arrange bailout programs, as was the case for Greece starting just after its independence. The Greek crisis of 1833 started out as a loan from private creditors, which Greece could not repay; the then-Troika (France, Great Britain and Russia) repaid the private creditors and Greece’s debts shifted to official hands, but even after decades in default and financial self-sufficiency, Greece still faced repayment of that loan more than 100 years later. Thus, a key ingredient in the resolution to the ongoing Greek crisis is a deep nominal haircut on the stock of official (and possibly private) external debt — shifting the balance to domestic sources of funding. Two hundred years of evidence supports the view that chronic reliance on external capital has repeatedly led to ruin.