Thursday, 16 February 2012

Greece, Germany and “Supersanctions”

“The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone “budget commissioner” to secure a second €130bn bail-out.”

“German holders of Greek bonds had demanded international financial control of Greek finances.”

Despite their strong similarity, 119 years separate these two quotes. The first one emanates from the January 27th, online version of the Financial Times, the second one is the description made by Wynne (1951) of the Greek situation in 1893!

In 1893, existing financial difficulties combined with a strong crisis in currant trade forced the Greek government to declare a partial default. The country announced a unilateral reduction of interests on its foreign bonds of 70%. This led to immediate protests by English, French and German bondholders association. Most notably, bondholders wanted the government to pledge substantial revenues for the bond service. Negotiations between Greece and bondholders were still going on at the outbreak of the Greco-Turkish War (1897). Defeated Greece was forced to pay a large war indemnity to Turkey. Needless to say, its financial position rendered it unable to meet these obligations without foreign aid. In this situation, it became easy for German representatives to impose the control of Greek public finances by an international financial commission. As a guarantee, the commission could count on the control of state monopolies, stamp duties and custom duties of the ports of Piraeus, Corfu, Volos, Lavrion and Patra (Andrepoulos, 1981).

Were German demands a sign of a deep rooted German Hellenophobia? Was it exceptional or quite common at the time? And if so, did it prove useful? According to Kris Mitchener and Marc Weidenmier (2010), “supersanctions”, defined as military pressure or political control applied following a debt default, were commonly used during the gold standard period (1870-1913). During this period, 64% of defaulting countries experienced a form of sanction. For small Central American countries threat of (or actual) military interventions were common following a default (Costa Rica, 1911; Guatemala, 1913; Nicaragua, 1912, Santo Domingo 1905-1913 and Venezuela 1902-1903).

Fiscal “house arrest” was also common following a default. Taking over public finances could either be done by a single country or by a group of creditor countries. In some cases, such a control led to the imposition of a protectorate (Morocco and Tunisia). A quick look at the countries sanctioned gives the impression that small Latin American countries were likely to face military intervention, whereas Middle Eastern (Egypt, 1881; Ottoman Empire, 1882) or small European countries (Greece, 1893, Serbia, 1895) were likely to see their fiscal powers taken over.

How did these sanctions affect the economy of the different countries? Kris Mitchener and Marc Weidenmier (2010) look at two distinct elements: trade and public finances. They show that following the sanctions trade declined dramatically in Egypt, Greece and the Ottoman Empire. To give an idea, they estimate that Greece trade declined by approximately 20%. More positively, they find that the imposition of an external control helped improve public finances.

Are these results worth the loss of sovereignty experienced by the defaulting countries? In the Greek case, an international financial commission was appointed in 1898 to control public finances. As pointed out by Andreopoulos (1981), “with this humiliating intervention, public finance was surrendered to the Great Powers for a period of 44 years” (in 1932, Greece defaulted once more on its sovereign debt).

Whatever the costs for bondholders, humiliation is never a good long run policy. As Mark Twain remarked: “History Doesn't Repeat Itself, But It Does Rhyme”.

Andreopoulos George, (1981), “State and Irredentism: Some Reflexions on the Case of Greece”, The Historical Journal, 24.4, pp.949-959.
Mitchener Kris, Weidenmier Marc, (2010), "Supersanctions and Sovereign Debt Repayment", Journal of International Money and Finance, 29, pp. 19-36.
Spiegel Peter, Hope Kerin, “Call for EU to control Greek budget”, The Financial Times, January 27th, 2012, available at
Wynne William H., (1951), State insolvency and foreign bondholders, New Haven, Yale University Press, vol. 2, p. 284

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