The 10-year Greek government bond yield has recently fallen below 1 percent, which is quite an achievement, especially after the financial crisis of the last decade, when the 10-year bond yield reached 36, 5 percent.
This reminds us of the famous independence loans, which were the first to be arranged by Greece before it was recognized as a free state.
Many academic and political circles refer to these UK loans as “burdensome” or “theft”, and an example of exploitation of a poor country by foreign bankers.
One might wonder if these loans really constituted the “ruthless exploitation” of the country, and if the representatives of Greece were foolish to accept their terms.
There were two loans.
The first loan was concluded in 1824, for 36 years (insurers: Loughnan & Sons and Ο’Brien), with a face value of 800,000 pounds sterling. The amount disbursed was £ 472,000 or 59 per cent of the face value. The loan was negotiated from the Greek side by Ioannis Orlandos and Andreas Louriotis.
The second loan was concluded in 1825, for 36 years (insurers: Ricardo Brothers), and a face value of £ 2,000,000. The amount disbursed was £ 1,100,000 or 55.5 per cent of the face value.
Both loans were bonds with an interest rate of 5 percent and an annual repayment rate of 1 percent (both on the face amount). In both cases, the interest payments for the first two years were prepaid.
The second loan agreement also provided for the use of £ 250,000 to partially pay off the first loan in order to maintain its market value in the secondary market.
We will compare the terms of these loans with what currently applies to Greek government bonds.
To repay the capital, both contracts provided for the payment of 1 percent of the nominal capital annually for 36 years. Of course, the sum of all these fees amounts to 36 percent of the capital. However, if (theoretically) those payments were deposited each year into an interest-bearing account with a safe interest rate by market standards (5 percent), this deposit would reach 100 percent of principal at the end of the 36 years.
This method of calculating the final value of a recurring payment to an account (sinking fund) of X amount over Y years, where the deposited amount is compounded annually at a safe interest rate, applies even today. The only difference is that today the safe rate (for example, the Bundesbank interest rate or US bonds) is around 3 percent or less, whereas back then it was 5 percent.
The borrowing rates at that time, which fluctuated depending on the risk of each investment, were generally almost double those of today. This is also supported by the related literature.
What may confuse today’s readers is the fact that instead of receiving £ 800,000, the borrowers (i.e. the Greek revolutionary government) charged only 59 per cent (£ 472,000).
Many think that the difference was withheld for extortion and, consequently, that the loan was a “robbery.” Were the rebellious Greeks victims of the foreign Shylocks?
Of course, no. The terms of the loan simply had to be adjusted according to risk.
Today, the terms of a loan are adjusted according to the risk it presents, through the interest rate. The higher the risk and the longer the repayment period, the higher the interest rate.
Back then, however, markets did things differently.
The loan agreement provided for a safe interest rate (5 percent) and the adjustment, depending on the risk, was achieved by purchasing the bonds at a lower than nominal price. This practice is partially used even today.
In other words, this is exactly what happens in the secondary bond market today as well, and the interest rate the creditor received was the “yield” on the bond.
Indeed, the real interest rate for the first loan was not 5 percent nominal, but about 8.47 percent (5 / 0.59).
Furthermore, according to the terms of the loans, Greece paid annually 1 per cent of the nominal amount of the loan for the amortization of the principal, while in reality it would have to pay only 0.59 per cent to repay the amount that it actually received as a loan. To take that into account, we add this additional 0.70 percent charge on real principal at the 8.47 percent interest rate, resulting in the real interest rate of 9.17 percent.
Consequently, in the case of the second loan, the real interest rate was 9.80 percent.
In conclusion, we deduce the following:
– The first loan was a 36-year bond issue for a total value of £ 472,000 with an interest rate of 9.17 per cent. This was not a £ 800,000 loan in current terminology, of which £ 328,000 was wrongly withheld by the lenders.
– The second loan was also a 36-year bond issue for a total value of £ 1,100,000 with an interest rate of 9.80 per cent. It was not £ 2,000,000, and again in this case the same applies to the difference of £ 900,000.
These terms, and especially the real interest rate, are not “theft” at all, especially if we consider the following:
(a) the guarantees that borrowers could present:
The would-be borrowers were not even a recognized state, but simply representatives of a “rogue nation” with the ambition to form a state, and which, after some initial successes, entered a civil war. In parallel, the Ottoman Empire referred to this “rogue nation” as “terrorists”, while the Holy Alliance saw it as a serious threat to peace in Europe.
(b) that the general level of interest rates internationally was at that time higher than it is today, as evidenced by the fact that the “safe rate” was 5 percent, while today it is approximately half that level. Therefore, the (real) interest rate of 9.5 percent, which was applied to Greece, corresponds to an interest rate of 5.5 to 6 percent by current standards. These terms are very favorable, at least under current terms, much less when it comes to 36-year bonds.
Furthermore, the best proof that the terms of these loans were not onerous, quite the contrary, is the following. One of the conditions of the second loan was to partially repay the first loan for a total face value of £ 250,000.
This was done, and the redemption price was £ 113,200 in the first stage, that is, £ 45.3 for each £ 100 bond.
Regardless of whether this buyback was advisable or not, we observed that one year after its issuance, the price of the first loan on the free market (or secondary) had fallen from £ 59 to £ 45.4 (that is, they depreciated by a 23 percent). and, respectively, the bond yield went from 9.5 percent to 11.9 percent.
Therefore, the “markets” had judged that Greek bonds were overvalued and that their real value, in line with the risk posed by these bonds, was £ 45.4 instead of £ 59.
Therefore, it was the lenders of the first loan (that is, the original buyers of the bonds) who had suffered a loss, not the borrowers. Nor should we forget that the real lenders were not some “bad” bankers, who were reasonably eager to earn a commission, but bondholders who were mainly filhellens (and most of them mere citizens), who wanted to help the insurgent Greeks. . and honor the memory and struggle of Lord Byron.
It should also be noted that all the loans agreed by Latin American countries with English banks between 1822 and 1825 had a similar structure. In general, the terms of the loans to Greece were better. As a guide, all loans (with the exception of the first loan from Mexico) had an initial interest rate of 6 percent, instead of 5 percent, while significant fees were paid.
For example, the terms of the first £ 3,200,000 loan to Mexico from BA Goldsmith & Co bank in 1824 were as follows. The price to buy a £ 100 bond was £ 58. The interest rate was 5 per cent. The sale raised £ 1,850,000.
However, a commission of £ 750,000 was deducted. So Mexico finally got £ 1,100,000. The comparison with the conditions of the Greek loan is simple. Note that after a revolution that began in 1810, Mexico was already an independent state as of August 24, 1821.
The bottom line is that the famous “English loans” were by no means a robbery, and those who negotiated them were neither traitors nor fools. In fact, they were assisted by filhellenes, valuable financial advisers.
The subsequent management of the loans was probably not adequate, and there appear to have been several lapses; But the loans themselves were on reasonable terms, given all the parameters.
The problem with these loans was not their conditions, but Greece’s inability to use the funds to support the struggle and then to serve them for years to come through wise financial management.
It is also worth noting some other parameters related to these loans. Beyond the financial aspects, these loans constituted the strongest political acts of official recognition of the insurgent Greeks and the prospect of the establishment of an independent Greek state.
The loans were made possible when the great British politician and filhellene George Canning assumed the post of Foreign Minister in the United Kingdom.
Canning drastically changed the policy of his predecessor, Viscount Castlereagh. He recognized Greece as a country at war and gave the green light to the City of London to make loans to Greece.
In any case, even if the Greeks had made the most of their loans, history has shown that the liberation of the nation required a decisive naval battle at Navarino.
This battle involved 29 of the best ships of the three allies with the most experienced personnel on board, under the command of British Grand Admiral Sir Edward Codrington, who destroyed the Turkish-Egyptian fleet of 90 ships.
Furthermore, to persuade Ibrahim Pasha to leave Greece, it took another 10 months and the presence of a regular army of 15,000 men under General Maison and, in parallel, continuous negotiations between Codrington and Egypt to reach a final agreement alone. in July 1828.
Has anyone ever calculated the value of this support that Greece received from its allies, and first of all from the United Kingdom? How many more loans would Greece have to receive and what blood tax would the Greeks have to pay on their own to win their freedom?
If all this is taken into account, we can conclude that these loans were almost free and that the help and support that Greece finally received was unprecedented, as it is today, internationally.
The Greeks owe this support to Philohellenism and the admiration expressed by the Western world for Greek culture and heritage that has emanated over the centuries from the marbles of the Acropolis of Athens.
Nikos Apostolidis, former professor at the National Technical University of Athens, and Constantinos Velentzas are members of the Advisory Council of the Society for Hellenism and Philhellenism (www.eefshp.org).