The future of Greek financial negotiations is ancient history

The majority of Greeks do not rightly comprehend the meaning of a [foreign] loan, but simply conclude that it is some European method of making a present.

A description of the popular support for the first post-independence Greek loan in 1824 from A Picture of Greece in 1825 by J Emerson, Count Pecchio, and WH Humphreys, London 1826

Nowadays you would probably find a very similar comment printed in German in some large-circulation tabloid, or loudly muttered in the corridors around a eurogroup meeting. When people ask me what is going to happen next in the Greek negotiations, I admit to having cheated. I looked up the answers in the history books. It works better than trying to get inside information from the cabinet, since there is no information on the inside.

Every single diplomatic twist and manoeuvre in the Greek negotiations can be found in the dusty, yet-to-be-digitised archives of past negotiations. In the present time, we have even had visiting foreign warships, a staple of 19th century financial diplomacy, and, arguably, the partial foreign occupation of Pireaus, albeit by currently unarmed Chinese engineers.

Locals scheming with Russia to intimidate international creditors? Well, during the Crimean war, Greece’s pro-Russian moves against the allied European creditor states were, as one account has it, “infuriating the Powers. At the end of May 1854, an Anglo-French military force occupied the port of Piraeus. The Allied Ministers forced [King] Otho to declare that Greece would remain strictly neutral during the war with Russia”. Otho, by the way, was a Bavarian, some of whose descendents I know quite well. He had gone native, in the old colonial terminology.

I am not sure whether measures such as those the Powers took then will be used during the June European meetings to reconsider sanctions on, yet again, Russia, but feelings are already running high. Greece actually has the largest navy in the Mediterranean, so if the Royal Navy were sent again it might have to dock in Piraeus for repairs afterwards.

In the end the lenders were satisfied by the appointment of a financial commission of inquiry in 1857, with representatives of three international powers, a “troika” you might say. The commission found that “the governmental agencies charged with collecting and administering public revenues had entirely failed to exercise proper surveillance and control”.

Eventually there was a renegotiation and settlement of the issues in 1864. It was only in 1879 that Greece was able to return to the international financial markets. The underlying economy that would be servicing the debt had not changed all that much. As John Levandis (The Greek Foreign Debt and the Great Powers) wrote in 1944, referring to 1879, “On no occasion during that [preceding] period of 50 years was a broad project of rehabilitation adopted by a responsible political leader”. However, there was an international credit bubble, and there was credit again for Greece. This time . . . oh, never mind the details. It did not end well.

Things have gotten both better and worse since. There are many more well-educated, hard-working Greeks with universalistic values. How many of those still live in the Hellenic Republic as taxpaying productive citizens, though, is an open question. After each past crisis, many of the best locals just picked up and left, and the same has been happening this time. The consequent erosion of the talented part of the working age population is just not captured in the statistics gathered by the government and the troi… sorry, the “institutions”. Already the population is declining faster than previous statistical projections.

I understand they have completed the systems updates at the central bank that were necessary for the swift imposition of capital controls. I will leave the exact dates to the rumour mill and chance.

The problem is how they can ever be removed, since the situation of Greece is much worse than that of Cyprus when it imposed limited capital controls in March 2013. A “post- devaluation boom in exports and tourism” is a fantasy of economists and politicians.

As my Athenian friend Philip Ammerman wrote to me on Friday, “Greek exports have collapsed largely because of a lack of trade finance or working capital. In the past, Greek banks were typically able to factor or finance exports based on an export order or contract. Moreover, international actors like Euler Hermes, the credit insurer, would more easily grant credit risk insurance to European imports from Greek companies. Right now, both sources of finances are entirely closed off.”

This has been made worse by the Greek government’s effectively having seized the euros from VAT rebates that usually make up the working capital of the exporters. And how will tour operators deal with the risk to the deposits for pre-booked holidays this summer?

I believe it will be difficult not only to remove capital controls in any foreseeable timeframe, but to enable the less disruptive outcome of a “default within the euro”. This will be much worse than people think. Greeks may even lose some of the Schengen travel freedoms. The good news, from the Brussels/Frankfurt point of view, is that fear will create a new force for solidarity among the peripheral EU members states.

Except for that one over there, they look a little shaky . . .