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Joseph Yackley


History's Lessons for Greece

Posted: 05/03/2012 23:00

Europe may have averted imminent disaster last month with its €130 billion bailout of Greece. But in this latest stopgap, European officials are repeating many of the mistakes their forebears made more than a century ago in their handling of debt crises in southern neighbours.

For all of the handwringing from pundits about an "unprecedented write-off" of Greek debt or, conversely, an "unprecedented intrusion" on Greek sovereignty, this deal is unprecedented neither in the magnitude of the write down, nor in the intrusiveness of the conditions. History is littered with similar financial interventions. And two in particular - those of Egypt and the Ottoman Empire in the 1870s - hold valuable lessons for Greece.

To receive the EU bailout funds, Greek officials pledged to reduce the national debt from its current level of 160% of GDP to 120.5% by 2020. Greece also agreed to an "enhanced and permanent" presence of foreign monitors to oversee economic policy. The Greek Constitution will be amended to prioritise debt repayments over funding services, and the government will establish a special account filled with enough money to service three months of debt.

This all sounds rather familiar. In what was then dubbed "The Great Depression," a collapse of the Austrian Stock Exchange in 1873 rippled across the globe and quickly dried up international credit markets. Several "peripheral" governments could no longer borrow to meet payments on their existing debt and were forced to default. Two of those governments were in Cairo and Constantinople. For decades thereafter, Egypt and the Ottoman Empire were subjected to foreign meddling in their domestic affairs. Spearheading the interference were two international financial commissions, run and staffed by European officials who were authorized to collect revenues in order to pay down the outstanding debt.

Yet, although the Ottoman and Egyptian economies were in comparably dire straights, the two commissions differed sharply in the power they were granted and the policies they pursued - with profound and lasting implications for both Egypt and the Ottoman Empire.

The economic conditions placed on Egypt were far more austere. Severe cutbacks in spending on public services and the military fueled a nation-wide revolt, which was put down only after British troops stepped in to protect the Suez Canal. It took Egyptians 70 years to dislodge them.
The Ottoman Empire, on the other hand, was forgiven a greater share of its debt, granted lower interest rates, and retained more financial freedom, particularly over expenditures. The economy rebounded quicker and Ottoman subjects, although squeezed, did not revolt on a large scale. The empire avoided foreign invasion and made regular debt payments until World War I.

There are lessons to be learned in all of this. Here are the top five:


The diagnosis matters for the policy prescriptions. Orientalist explanations of Egypt's bankruptcy are being recycled in Greece. Greeks are deemed wasteful, lazy, and corrupt. Based on such a diagnosis, the prescribed remedy naturally follows: Make Greece, or at least the way Greek officials manage their economy, less "Greek." This was precisely the path taken in Egypt, which needed to be rescued from "the ills of the East." Such stereotypes were less prevalent in the Ottoman case, and the plan to restore Ottoman credit was, in turn, far less invasive and, ultimately, more successful.


Economic recovery requires balancing austerity and growth. In Greece, the emphasis is almost solely on austerity. New cuts will further slow the economy, which has is entering its fifth year of recession. In the Egyptian case, the debt commission sought to boost revenue, while cutting expenditures. Not surprisingly, the economy took longer to rebound. Bond spreads returned to pre-crisis levels only after Britain assumed total control as part of its occupation. Meanwhile, the Ottoman debt commission focused on raising state income, while leaving spending in the hands of Ottoman officials. Investments in ports, railroads and telegraph lines continued. The economy grew, and bond yields returned to normal levels almost immediately.


Process matters. Europe has been offering Greece interim, stopgap measures, rather than pushing for a decisive resolution. This bailout is the second of what will likely be several. The same ad hoc approach wreaked havoc in Egypt. By the time British troops arrived in 1882, no less than five different plans had been hatched and had failed. With each collapse, the cost of borrowing rose further. The Ottoman commission, on the other hand, grew out of a single set of negotiations and was the result of compromise rather than European fiat.


The pain should be shared. Private holders of Greek debt agreed to a "haircut" of what will turn out to be 70-75% on the value of their bonds. This is in line with the write-down on Ottoman debt and will give Greece a fighting chance to dig itself out of this hole. It will drive up the price of borrowing in the future, but that is not inherently bad. Access to cheap credit is what got Greece into this mess and by forcing Greece's bondholders to take a sizable haircut, the EU is reminding investors that lending involves risk.


Local impressions of the bailout matter. Opposition to the Ottoman settlement was sporadic and muted. But when Egyptians were forced to shoulder nearly the entire burden of their leaders' profligacy, they took to the streets. In Greece, we are more likely to see a replay of Egypt. Greeks are entering their fifth year of recession, having watching their standard of living slide and unemployment soar. Their voices will be heard in April's parliamentary elections, when parties on the extreme right and left will gain seats. A populist, anti-EU parliament bodes well neither for Greece nor for Europe.

The late February deal will comfort the EU more than Greece. Much like Egypt more than a century ago, Greece has bought itself some time, but at the cost of its fiscal sovereignty. As austerity bites and humiliation sets in, many Greeks will grow angrier still, fanning the flames of anti-EU hostility. If history is any lesson, this is not the last act in this Greek tragedy.


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