An Examination of the Role of Domestic Debt in Greek Financial History

Date Presented:

Abstract:

This thesis presents original data on Greece’s domestic debt from1824–1927 and assesses its role during the country’s first century of borrowing. It finds that the loans issued by the National Bank of Greece consistently played a minor role, averaging 10–25% of the overall outstanding debt. The developments in borrowing, repayment, and default coincided with changes in the foreign debt or macroeconomic conditions. The major defaults that occurred in 1843 and 1893 were triggered at the extraordinarily high debt burden levels of 200–300% of GDP. Additionally, an empirical analysis finds that the interest rate prices of the foreign debts align closely with structural fundamentals such as GDP and trade balance, whereas the prices on the domestic debt do not. This supports the hypothesis that the National Bank, as both a commercial lender and the country’s debt manager, engaged in a mild form of financial repression by subsidizing its loans to the state and provided funding regardless of the perceived credit risk. The domestic debt was cheaper, but also of a much smaller magnitude reflective of the country’s incomplete asset market structure, and at no point did it match the foreign debt’s ability to fund the state’s needs. The domestic market’s credit constraints may partly explain why the country accepted costly political and economic interventions in return for access to international financial markets.