Thursday, 23 February 2012

Sovereign Debt Diplomacy

The recent second Greek bailout has been accepted after intense negotiations. As for any negotiations, countries came with their own political agenda. Press reports shed some light on these motivations. For example, European diplomats informed the Financial Times that “the German and Dutch finance ministers pushed for further “haircuts” in Greek bonds” suggesting that these countries were willing to limit the involvement of their taxpayers.

Although the role of diplomacy is important, the exact motivations of the countries providing the bailout are often overlooked. Diplomatic, economic and geopolitical considerations probably play a more important role than pure altruistic motivations. For instance, Der Spiegel published a few months ago an insightful article detailing French sales of military vessels to Greece, which was already at the time struggling to make end meets. The article stressed German reactions to these sales. Surprising as it may seem, it was not the sale itself which was questioned but the fact that ThyssenKrup had lost the deal to the French company DCNS! German taxpayer money was going to end up subsidizing a French company (read: instead of a German one). Critiques regarding arm sales to Greece had however been voiced a year earlier by Turkey. Stephen Castle, in the New York Times had indeed reported in March 2010 that “Egemen Bagis, Turkey’s chief negotiator with the European Union, has criticized Germany, along with France, for seeking to sell military equipment to Greece while pressing the government in Athens to make drastic public spending cuts as a result of its dire financial crisis.”

For economic historians, this arms sales saga hardly comes as a surprise. The exchange of financial favors for economic or even diplomatic support has a long history.

For instance, the French government took in the past advantage of the demand by foreign governments to have their bonds listed on the Paris Bourse. From the 1880s on, foreign listing on the Paris Stock Exchange were subject to the approval of both the French Finance and Foreign Affairs Ministers (Boissière, 1925). Loans to be issued by companies in competition with the French industry, such as the one proposed by US Steel Corporation in 1909, were sometimes excluded from the French market (Feis, 1930). The French government did not hide its intentions. In parliamentary debates, the Foreign Affairs Minister explicitly conditioned financial support to orders for the French industry. Serbia or Bulgaria were explicitly told that they should buy from where they had borrowed… In some instances, financial support was exchanged against diplomatic help. For example, Russia traded its political support at the Algeciras conference in 1906 against a new loan on the Paris stock exchange. The Russian support helped France counter the German ambitions in Morocco.

Arm sales were also crucial at the time. Feis (1930) lists a series of fascinating examples. In 1909, an Argentinean loan was blacklisted because Argentina had committed the major crime of buying armaments from Germany! A year later, Japan omitted to place orders with French shipyards and saw its loan opposed. A message of similar nature was sent to Portugal: if it kept on planning to buy from British shipyards, it should abandon all hope to float a bond in Paris. One century later the situation seems strikingly similar.

To conclude, quoting Lawrence Durrell (who spent a long part of his life in Greece on the island of Corfu) seems appropriate: “History is an endless repetition of the wrong way of living”.

Boissière G., (1925), La compagnie des agents de change et le marché officiel à la bourse de Paris, 2ème édition, Paris, Arthur Rousseau.

Feis H., (1930), Europe the World’s Banker 1870-1914: An Account of European Foreign Investment and the Connection of World Finance with Diplomacy before the War, New Haven, Yale University Press.

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