Recently, the yield on the 10-year Greek government bond fell below 1% for the first time in the history of Greece, which is an achievement, after the adventures of the last decade, when the ten-year bond yield reached 36.5%. This reminds us of the Independence loans, the first ones contracted by Greece, before it officially became a free state.
OF NIKOS APOSTOLIDIS, KONSTANTINOU VELENTZA
SOURCE:DAILY
Many academics and politicians characterize these loans from the United Kingdom as "onerous", or "predatory", and evidence of the exploitation of a poor country by foreign bankers. However, did these loans really constitute exploitation of our country and were the representatives of Greece who agreed the terms stupid or incompetent?
These loans were two:
The first was concluded in 1824, for 36 years, with Loughnan Sons and O'Brien as issuer, and had a nominal loan amount of £800,000. The amount disbursed was £472,000 or 59% of the nominal amount. The loan was negotiated from the Greek side by Orlandos and Louriotis. The second loan was contracted in 1825, for 36 years, with the Ricardo brothers as issuer and had a nominal loan amount of £2 million. The amount disbursed was £1.1 million or 55.5% of the nominal amount. Both loans were bonds, with an interest rate of 5% and an annual amortization of 1% (both on the nominal amount). In both, the interest payments of the first two years were collected. The contract of the second loan provided for the provision of £250,000 for the discounting of bonds of the first loan, with the aim of supporting their price on the secondary market.
The terms then and now
We will compare the conditions of these loans with those currently in force with the loans of the Greek State. For the repayment of the capital, both contracts provided for the payment of 1% of the nominal capital per year for 36 years. Of course, the sum of all these debts reaches 36% of the capital, but (theoretically) if this debt was deposited every year in an account with a safe interest rate according to the market data (5%), this deposit would reach the end of 36 years 100% of the capital.
This method of calculating the final value in an account (sinking fund) of an amount X over Y years, where the amount is compounded every year with a safe interest rate (safe interest rate), is valid until today. The only difference is that today the safe interest rate (eg Bundesbank or US bond interest rate), is around 3% or less, whereas back then it was 5%. The lending rates of that time, which of course varied according to the risk of each investment, were almost twice what they are today. This is also apparent from the relevant literature.
What is strange to today's readers is the cut of the capital that the revolutionary government of the Greeks finally collected, with the result that instead of the nominal amount (£800,000), it received only 59% (£472,000). Many believe that the difference was seized abusively and therefore the loans were "predatory". Did the insurgent Greeks fall victim to foreign Shylocks (like the Merchant of Venice)?
Of course not. Simply, the terms of the loan were shaped according to the risk. Today, the structuring of the terms of a loan depending on the risk is done through the interest rate. The greater the risk and the repayment period, the higher the loan interest rate. In those years, however, they followed a different practice. The loan agreement provided for a "safe" interest rate (5%) and the risk adjustment was made by purchasing the bonds at a price below par.
This practice is still partially used today. In other words, what was done today in the secondary bond market was done, and the interest rate collected by the lender was the "yield" of the bond. In practice, the real interest rate on the first loan was not the nominal 5%, but about 8.47% (5/0.59).
Also, according to the terms of the loans, the Greek state paid 1% per year for arrears, while it would have to pay only 0.59% to repay the amount it had actually collected as a loan. As a correction for this interest charge, which reached 0.70% on the real capital, we can add it to the interest rate of 8.47%, and thus finally obtain the real interest rate which was 9.17%. Correspondingly, in the case of the second loan, the real interest rate was 9.80%.
In conclusion, we find that:
• The first loan was a 36-year bond, amounting to £472,000 with an interest rate of 9.17%. In other words, it was not worth £800,000 (in today's terminology), with the difference of £328,000 having been improperly withheld.
• The second loan was also a 36-year bond, totaling £1.1 million with an interest rate of 9.80%. It was not in the amount of £2 million, and therefore the same applies here for the difference of £900,000.
These terms, and especially the real interest rate, are not "predatory" at all. Especially if we consider the following:
(a) The guarantees presented by the borrowers:
The would-be borrowers were not even a recognized state, but simply the representatives of a revolted nation who aspired to form themselves into a state in time, and who, after some initial successes, had indeed become involved in civil war. At the same time, it must be taken into account that the Ottoman Empire called this rebellious nation "terrorists", while the Holy Alliance saw it as a serious threat to the peace of Europe.
(b) That the level of interest rates at that time was internationally higher than today, as shown by the fact that the "safe" interest rate was 5%, while today it is about half that value.
Therefore, the (real) interest rate of the order of 9.5%, with which Greece was burdened, corresponds to an interest rate of the order of 5.5%-6% with today's data. These terms are very favorable, at least according to those that apply today, especially when it comes to 36-year bonds.
Loss for Lenders
However, the best proof that these loans were not onerous, but the opposite, is the following:One of the conditions of the second loan was to prepay bonds of the first, with a total nominal value of £250,000. This was done and the purchase price was initially £113,200, i.e. £45.3 for each bond with a face value of £100.
Regardless of whether this redemption was intentional, we find that one year after their issue, the price of the first loan bonds on the open (or secondary) market had fallen from £59 to £45.4 (they were 23% undervalued). and correspondingly the "yield" of the bonds rose from 9.5% to 11.9%. Well, the "markets" had decided that the bonds were overvalued and that their real, risk-adjusted value was £45.4, not £59.
Therefore, the losers from the first loan were the lenders, the original buyers of the bonds and not the borrowers. In fact, the real lenders were not the "bad" bankers, who understandably wanted to make some commission, but the bondholders who were largely philhellenes (mostly ordinary citizens), who wanted to help the revolutionary Greeks and honor the memory and struggle of Lord Byron.
It is also worth noting that all the loans received by Latin American countries from English banks in the period 1822 to 1825 had a corresponding structure. In general, the loans to Greece had better terms. As an example, we mention that all the loans (with the exception of the first loan received by Mexico) had an initial interest rate of 6%, instead of the 5% that Greece had and large commissions.
For example, for the first loan of an initial value of £3.2 million that Mexico received from the bank B.A. Goldsmith &Co, in 1824, the following were true:The purchase price of a £100 bond was £58. The interest rate was 5%. From the sale, £1.85 million was collected. From this, however, commissions of £750,000 were deducted. Thus, Mexico finally received £1.1 million. The comparison with the terms of the Greek loan is clear. Let us recall that after the Revolution that began in 1810, Mexico was already an independent state on August 24, 1821.
The final conclusion is that England's famous loans were by no means predatory and those who negotiated them were neither traitors nor fools, aided by worthy Philhellenic financial advisers. It may be that the subsequent management of the loans was not appropriate, and as it seems, various tragedies occurred, but the loans themselves were concluded on very reasonable terms, if we take into account all the parameters. The problem with these loans was not their terms, but the inability of our country to first utilize them in favor of its Struggle and then to service them through good financial management in the years that followed.
However, it is worth noting some other parameters related to loans. Apart from the economic aspect, the loans constituted the strongest political acts of official recognition of the Greeks and their prospect of establishing an independent state in the future. The conclusion of the loans became possible when the great British politician and philhellene George Canning took over as Foreign Secretary in the United Kingdom, who drastically changed the policy of Castlereagh's predecessor. He recognized Greece as a country at war and gave the green light to the City of London to conclude the loans. However, even if the Greeks had made the best possible use of the loans, History proved that the liberation of Greece required the Battle of Navarino.
The support of allies
Nevertheless, it took another 10 months and the presence of a regular army of 15,000 men under General Maizon to convince Ibrahim to leave Greece. And at the same time, hard negotiations between Codrington and the Egyptians that ended in an agreement only in July 1828. Has anyone ever calculated the value of the support that Greece received from its allies, first and foremost the United Kingdom? How many more loans would Greece have to take and what blood tax would she have to pay herself to gain her freedom?
If all this is taken into account, then we come to the conclusion that the loans in question were almost gratuitous and that the help and support that Greece finally received was then, as it is today, unprecedented in international annals. We owe this help to philhellenism, to the Western world's admiration for Greek culture and our heritage, which the marbles of the Acropolis of Athens radiate throughout the centuries.