The Pitfalls of External Dependence: Greece, 1829–2015

Abstract

Two centuries of Greek debt crises highlight the pitfalls of relying on external financing. Since its independence in 1829, the Greek government has defaulted four times on its external creditors—with striking historical parallels. Each crisis is preceded by a period of heavy borrowing from foreign private creditors. 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; political interference from abroad mounts, and a prolonged episode of debt overhang and financial autarky follows. We conclude that these cycles of external debt and dependence are a perennial theme of Greek history, as well as in other countries that have been “addicted” to foreign savings. At present, there is considerable evidence to suggest that a substantial haircut on external debt is needed to restore the economic viability of Greece. Even with that, a policy priority for the country should be to reorient, to the extent possible, toward domestic sources of funding.