Michael Waibel is a British Academy Postdoctoral Fellow at the University of Cambridge.
After losing a disastrous war to the Ottoman Empire in 1898, Greece was unable to service its existing debt or to pay an indemnity. The major European powers, alongside private bondholders pushed for the establishment of an international commission of financial control. Greece reluctantly agreed. The commission, consisting of representatives appointed by Austria-Hungary, Italy, Germany, France, Russia, and Britain asserted direct control over the main sources of Greek public revenue to ensure their debt was serviced. They also imposed other limits on Greek fiscal autonomy such as control over public borrowing and the money supply.
Fast-forward 113 years. Greece is at the epicentre of yet another sovereign debt crisis. On May 2010, Eurozone governments and the International Monetary Fund, in Act I of the newest Greek debt crisis, devised a 110 billion € ad hoc assistance package to prevent a possible default by Greece, but it failed convince financial markets. By covering the Greek wound with one insufficient plaster after another for the past 18 months, the Eurozone doctors have allowed the contagion to spread to major Eurozone economies, such as Spain and Italy. Policymakers have been fighting a rearguard action to get ahead of an increasingly systemic debt crisis that threatens Europe’s decade-old single currency itself.
On 21 July 2011, in Act II of the Greek Debt crisis, the European Council proposed emergency measures to shore up financial stability in the Euro area. These measures include additional financing of more than 100 billion € for Greece, lengthening of maturities and reduction in interest rates to about 3.5 percent on existing programmes for Greece, Ireland and Portugal, plus technical assistance on measures to increase competitiveness and structural reforms designed to boost economic growth.
Eurozone leaders also called upon the private sector to contribute, on a voluntary and exceptional basis, to restoring Greek debt sustainability by swapping Greek bonds maturing between 2012 and 2020. Given the implicit threat of a Greek default, it is doubtful whether the exchange is free from elements of coercion – an important factor for the rating agencies assessing the country’s creditworthiness and for whether credit default swaps, essentially insurance against sovereign defaults, will be triggered. If they are, large payment obligations by banks, insurance companies and others could be an additional channel for contagion.