Echoes of History - The Internation

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A. Echoes of History:
The International Financial Commission in Greece
Dr. Michael Waibel*
From Edward Law Street in central Athens, one can catch a glimpse of the 1
Acropolis in the distance and overhear the protestors camped out in Syntagma
Square. Named after Major Edward Law, this street reminds us that external
interference in Greek finances is nothing new. Major Law, as the first President of
the International Financial Commission of Control of Greece, achieved the seemingly
impossible at the end of the 19th century. He helped, in his role as the first President
of the International Financial Commission (IFC) that was established in 1898 at the
insistence of Greeces creditors, to return Greek finances to debt sustainability and a
sense of normalcy, albeit only temporarily.
Five years earlier, Major Law had spent four months on behalf of the British 2
government in Greece to survey Greek public finances. Though initially greeted by a
hostile local press, Law soon earned the admiration and gratitude of the Greek
people.1 His hard-hitting Report on the Economic and Financial Position of Greece
singled out high military spending, excessive borrowing abroad and inadequate tax
administration as the principal causes of the Greek financial difficulties. Despite these
shortcomings, he predicted a bright economic future for Greece.2 His report temporarily restored confidence in Greek credit.3 When he died in 1908, Law was buried
in Athens in a procession that resembled a state funeral such was the admiration
that his work elicited among the Athenian political class and ordinary Greeks.4
How did Major Law become such a central player in Greek history? This chapter 3
examines the rise and fall of the International Financial Commission in Greece
(the IFC), set against the background of Greek public finances in the 19th century.
As the most influential negotiator who worked on the Law of Control that created
the IFC, and its first President5, Law laid the groundwork for the IFCs operations
for the next five decades. The IFC played a central role in Greek economic life up to
and throughout the interwar period. The peace agreement in respect of the war over
Crete between Greece and the Ottoman Empire provided the foundations for the
establishment of the IFC.
Greece defaulted for the first time on the two independence loans of 1824 and 1825
to London banks shortly after independence. The first section covers the war of
independence against the Ottoman Empire (18211832), the first Greek default in the
* University Lecturer, University of Cambridge and Fellow at Lauterpacht Centre for International Law and Jesus College.
1 Theodore Morison, Life of Sir Edward FitzGerald Law (W. Blackwood and Son, Edinburgh, London
1911) 139; John A. Levandis, Greek Foreign Sovereign Debt and the Great Powers (18211898,
Columbia University Press 1944) 76.
2 Morison, 139.
3 Morison, 145.
4 Morison, 392394.
5 Morison, 214.
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Chapter 1: The Historical Experience and Economics of Sovereign Debt
1820s, embryonic attempts by the creditors of Greece to oversee debt repayment and
the events in the lead up to the Greek default in 1893. In conjunction with the 1887
Monopoly Loan to Greece, Greece and its creditors established the Societe de Regie de
Monopoles de Gre`ce whose task it was to collect and supervise the movement of all
funds from the revenues assigned for debt service.
I. Greek independence in 1832 and borrowing abroad

From 14581832, Greece formed part of the Ottoman Empire. Between 1821 and
1833, the Greeks rebelled and fought for their independence, and successfully
seceded from the Ottoman Empire in 1827, though it took until 1832 for independence to be fully achieved. The first Greek revolt against Ottoman rule took place
on 23 March 1821. Ten months later, the National Assembly proclaimed the
independence of Greece.
Throughout the 19th century, Greece was a central staging ground for the foreign
policy designs of the major European Powers. Foreign policy considerations, but also
philhellenic feelings among the political and intellectual elite6, led the major European powers to financially support Greece in the early years after independence.
Great Britain in particular was a strong supporter of Greek independence, but
was at the same time concerned that an independent Greece may fall under the
sway of France or Russia, or both. To Britain, Greece was her foothold in the
Mediterranean, acting as a counterweight to Russias ambition in the region. The
remaining European powers, still exhausted from the Napoleonic wars, initially
hesitated to support the Greek insurrection, against the recent memory of the
French Revolution. The support of European powers ranged from military intervention, over diplomacy to financing for the fledgling Greek state. The sole major
European power to oppose Greek independence was Austria.7 However the price
Greece paid for this financial and political support to free itself from Ottoman rule
was long-term political dependence on the European powers.8
The London Greek Committee took up the Greek cause in Britain and Blauqieres
exaggerated report of 1823 on the economic prospects of independent Greece excited
investors.9 Lord Byron, one of the leading advocates of Greek independence as a
member of the London Greek Committee, remarked that Britains true interests are
inseparably connected with the independence of those nations, who have shown
6 See generally William St. Clair, That Greece Might Still be Free, The Philhellenes in the War of
Independence (2008, rev. ed.); Colonel Leicester Stanhope, Greece in 1823 and 1824 Being a Series of
Letters and Other Documents on the Greek Revolution Written During a Visit to That Country
(1825); Jean Orlando, Andre Louriotis, Lettres inedites de Jean Orlando et Andre Louriotis: les
Philhelle`nes et la guerre de lindependance (1949) and Jason Manolopoulos, Greeces Odious Debt,
The Looting of the Hellenic Republic by the Euro, the Political Elite and the Investment Community (2011), 6063.
7 Robert D. Billinger, Metternich and the German Question, States Rights and Federal Duties,
18201834, 28.
8 Philips W. Alison, The War of Greek Independence, 18211833 (1897).
9 Report of the Present State of the Greek Confederation and Its Claims to the Support of the
Christian World, Read before the Committee on 23 September 1823. The Pamphleteer, XXII
(1823), 553570; Borchard, State Insolvency and Foreign Bondholders, 2 vols. (Yale University
Press, 1949), vol. II, 283; on the Committee see F. Rosen, London Greek Committee (18231826),
Oxford Dictionary of National Biography.
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A. Echoes of History:The International Financial Commission in Greece
themselves worthy of emancipation, and such is the case with Greece.10 At the time,
interest rates on British government debt were low, and the high yields offered by
lending to insurgent Greece were attractive. On the advice of the London Committee,
Greece sent a delegation composed of Orlando, Louriotes and Zaimes with the power
to contract loans.11
From 1821 onwards, the Greek insurgents had sent delegations to several
European capitals with a view to procuring funds for their fight for independence.
Initially, these efforts failed. In its first official act on 23 November 1821, the Greek
National Assembly already approved a foreign loan. Baron Theochary, Kephala
Olympios and Chroni Drossinos were authorized to borrow 150,000 florins of
Augsburg on behalf of Greece.12 In 1822, the Greek National Assembly authorized
its delegation at Ancona in todays Italy to negotiate a loan for up to 1 mln. Spanish
dollars. As security for the loan, the Assembly pledged all lands held by the
insurgents. Austrian Chancellor Metternich, however, opposed Greek independence
out of concern that a Russo-Turkish war would inflame evolutionary activity across
Europe and endanger the status quo of European balance of power encapsulated in
Congress of Viennas settlement. Metternichs strong opposition doomed the Italian
loan, and the Greek delegation returned home empty handed.13 In 1824, Napier, a
British military officer posted to Greece who also acted as military advisor to the
Greek insurgents approached the Greek London Committee for a loan of 40,000
to equip the Greek forces (which he aspired to command) against the Ottoman
Empire, but the Greek National Assembly failed to authorise such borrowing.14
Potential lenders also approached Greece, and peddled dubious schemes to
finance the Greek insurgents. The Knights of Malta were a particularly curious
example. They hoped to convince France that the resurrection of their moribund
order would serve French commercial interests in the region. The knights signed a
loan contract and a treaty of alliance with the Greek insurgents. The price for this
financial support was that Greece would be required, upon independence, to cede
the island of Rhodes in perpetuity to the Knights.15 Unsurprisingly, the proposed
loan fell on deaf ears in France.
In February 1824, two years into the war on independence, Greece finally
managed to borrow 800,000 from Loughman, OBrien, Ellice & Co, a London
bank.16 The Greeks viewed the first independence loan as a financial triumph and
as international recognition that independence was imminent.17 From the perspective of the lenders however, such loans to insurgents carried high risks. Lenders
could only ever hope to be repaid if the insurgents succeeded, and even then, as the
Greek case shows, they might suffer significant losses due to defaults.
10
Pietro Gamba, A narrative of Lord Byrons Last Journey to Greece (1825), 214.
Levandis, supra note 1, 13.
12 Levandis, supra note 1, 6.
13 Henry Kissinger, Diplomacy (1994), 92.
14 Douglas Dakin, The Greek Struggle for Independence, 18211833 (1973), 166.
16 Korinna Scho
nharl, Holderlins Einsatz fur ein schuldenfreies Griechenland, Frankfurter Allgemeine Zeitung, 9 February 2011.
11
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The issuing price of the first independence loan in 1824 was 59, with interest of
5 % on nominal capital and 1 % on sinking fund.18 This price translated into only
472,000 of net funding (59 %) to Greece, though on maturity Greece was obliged
to repay the entire 800,000 a common practice in the 19th century that
encouraged over borrowing.19 On top of this 39 % discount, the London bankers
withheld a further 123,000 (15 %) as negotiation and commission expenses and
interest and sinking fund charges for the next two years.20 The Greek government
received only 348,000 (44 % of the principal) as a result. The loan also marked the
beginning of financial mismanagement by the Greek government.
In early 1825, Louriotis, now looking for funds in France, negotiated a 20 mln.
francs loan with the Parisian bankers Cottier and Odier. Soon thereafter, he learnt
that Orlandos and Zaimis in London had already signed a loan agreement with
Jacob & Samson and Ricardo in London for 2 mln. The terms of the British loan
stipulated that no other lending was to take place in the same year which meant
that Greek insurgents had to choose between the French loan and the second
British loan. The Greeks opted for the cheaper British loan with an interest rate of
5 %, and backed out of the French loan. The price of issue of the latter was 55.50,
and hence offered an even more attractive yield than the first independence loan of
1825. The sum realized was 1.1 mln., with 816,000 effectively available to
Greece, or 40 % of the principal of the loan.21
All revenues and the whole of the national property of Greece were pledged
as security for the 1824 and 1825 loans. Both loans contained an identically worded
security clause: To the payment of the Annuities are appropriated all revenues of
Greece. The whole of the national property of Greece is hereby pledged to the
holders of all obligations granted in virtue of this Loan until the whole amount of
capital, which such obligations represent, shall be discharged, and to effect which a
Sinking Fund will be provided.22
Importantly, the two independence loans already provided for substantial oversight
of the lenders over the use of the funds. The London Committee and Jacob & Samson
and Ricardo appointed a Board of Control to oversee the use of the two preindependence loans. The members of the Board were S. Ricardo, J. Hobhouse, E.
Ellice and F. Burdett, who in turn appointed three resident commissioners in Greece
to act as an advisory body. The Committee and its resident commissioners were
tasked with acting in the best interest of Greece, and not only act as agent for the
lenders. They had the power to supervise and suspend the disbursement of funds.
In its practical operation, however, the Board fell considerably short. The Board
used more than 200,000 of the proceeds of the first loan to artificially prop up
prices of Greek debt, with a view to unload Greek debt held by insiders.23 Some of
the proceeds were used to construct new naval ships, though the construction
proceeded too slowly to be of any help in Greeces fight for independence and was
18
Borchard, supra note 9, vol. I, p. 283.

Cf. generally on sovereign lending practices during this period House of Commons, Reports on
Loans to Foreign States (1875).
20 Levandis, supra note 1, 14; Borchard, vol. II, supra note 9, 284.
22 Quoted from Borchard, supra note 9, vol. II, 28384, note 2.
19
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moreover marred by mismanagement and corruption.24 The English press severely

criticized the board for greed and incompetence in light of these irregularities.25
On 6 July 1827, France, Great Britain and Russia signed the Treaty of London,
and formally called upon the Ottoman Empire to cease hostilities against Greece
and recognise its independence.26 When the Ottoman Empire refused, the three
European powers intervened militarily. On 20 October 1827, they defeated the
combined Ottoman and Egyptian fleets at Navarino a victory that paved the way
for Greek independence.
When still fighting for independence from the Ottoman Empire, Greece defaulted on the two independence loans in 1828. Count John Kapodistrias, Greeces
first head of state, made a first attempt to repay the loan in 1829, but soon
thereafter he suspended payment on the external debt and sought to refinance
Greeces outstanding indebtedness.
On 3 March 1830, Great Britain, France and Russia agreed to guarantee each a
third of a new loan amounting to 60 mln. francs. It was up to Greece to find private
lenders willing to lend to it with the benefit of this guarantee, and this took years.
The loan was split up into three equal instalments of 20 mln. francs each. The
disbursement of the second and third tranche required the agreement of the three
Powers. Each guaranteeing state was only liable for one third of the total loan
volume. To the dismay of the holders of the two independence loans, their loans
were subordinated to the guaranteed loan.27
In January 1833, Greece concluded a loan agreement with Rothschild in Paris for
a 40 mln. francs loan a loan whose attractiveness was considerably enhanced by
the guarantee given by the three major Powers. The Powers had authorised the
simultaneous issuance of the first and second tranche of the loan. The issuing price
was fixed at 94, with interest at 5 % and the sinking fund charge at 1 %.28 Artt. XII
(5) and (6) of the London Treaty that guaranteed the loan allowed the three Powers
to intervene in Greek financial affairs, should Greece fail to live up to its payment
obligations. These provisions, in conjunction with the Board of Control established
in 1825 to oversee the two independence loans, contained the seeds of the financial
control exercised by the IFC six decades later.29 Under the terms of the loan, Greek
repayments were to start in 1840.
The three guaranteeing Powers were also anxious that the newly independent
Greece be constituted as a monarchy. After having dismissed several other ideas,
they finally decided to install Otto, second son of the philhellenic King Ludwig I of
Bavaria as the Greek King. He assumed the Greek throne at the age of 17 and
arrived in Greece on the British warship HMS Madagascar, commanded by
Edmund Lyons (who was to become a highly influential British Ambassador in
Greece from 18341849). He was advised by a regency council composed of three
24 Borchard, supra note 9, 284; Levandis, supra note 1, 2124; John Bowring, Summary Account
of the Steam-boats for Lord Cochranes Expedition; with some few words upon the two Frigates
ordered at New York for the Service of Greece, Westminster Review, January 1824, 113133.
26 Treaty between Great Britain, France, and Russia, for the Pacification of Greece, signed in
London 6 July 1827; Convention of 7 May 1832 between the Three Powers and the King of Bavaria,
Parl. Pap (183132), XLVII, also BFSP, XIX (18311832), 39.
27 Borchard, supra note 9, 285.
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senior Bavarian officials, who also doubled as the countrys first government post
independence. Count Josef Ludwig von Armansperg, a former Bavarian finance
minister who had restored Bavaria to financial health at the cost of his own
popularity, served as Prime Minister. 3,500 Bavarian soldiers protected King Otto
and the monarchy in Greece.30
The European powers and the private lenders to Greece insisted on financial
prudence, and taxes were higher in the early years of independence than they had
been during the Ottoman reign. As a result, Greeks were increasingly vocal in
complaining about the substitution of one foreign control (Tourkokratia) by
another (Bavarocracy).31 German was used as the language alongside Greek in
administering the state. King Otto and the Greek government had to remain on
good terms with the three European powers in order to ensure that the funding on
which Greece depended continued to flow.32 In 1836, the total proceeds of the 1833
guaranteed loan, which had amounted to 24.3 mln. francs, was exhausted and
Greece suspended debt service. Dissatisfied with Greek financial management, the
great Powers refused to authorise the third instalment of the loan, despite Greek
insistence.
In 1843, Greece again suspended payments on its debts. Given that repayment on
the guaranteed loan had become due only in 1840, Greece had remained current on
its debts for only three years. Greece pleaded with the three Great Powers for
leniency and requested that debt service be stretched until economic recovery set in.
Russia poured cold water on this request, and Great Britain and France followed
suit. The three Powers sent a joint note to the Greek government and requested that
savings of almost 4 mln. francs annually be made by the Greek Government, and
that the customs proceeds of Syra be pledged to debt service in return for easing the
payment schedule. Greece protested that these requests infringed it sovereignty, but
to no avail.33
The Greek government yielded to the demands of the three guaranteeing powers.
It accepted a Convention that the major powers had negotiated in London, to be
ratified by Greece within two months. The Greek government undertook to adjust
its finances by the full amount requested. In addition, it pledged certain revenue
sources specifically to debt service and placed them under the direct supervision of
the major European powers. A Rothschild agent who resided in Athens was charged
with supervising the arrangement.34
The revolution in September 1843 scuttled the plans for the convention to be
ratified on time. On 3 September 1843, the Greeks rebelled against King Otto, and
Greece again suspended payment on the guaranteed loan.35 Following the successful
revolution, the square in front of the Royal Palace became known as Syntagma
Square (Constitution Square). Ottos Bavarian troops having returned home, the
King agreed under pressure to a new constitution providing for an end to his
absolute reign and the creation of a National Assembly. The continuing influence of
30 John A. Petropulos, Politics and Statecraft in the Kingdom of Greece (Princeton: Princeton
University Press, 1968); C. M. Woodhouse, Modern Greece: A Short History (5th. ed., 1999), 155.
31 Petropulos, sapra note 30.
32 Richard Clogg, A Short History of Modern Greece (1979).
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the Great Powers was reflected in the formation of an English, French and Russian
party in Parliament.
Periodic attempts, in particular by Great Britain, to persuade Greece to finally
ratify the convention ensued, without success.36 On several occasions, Great Britain
referring to Art. XII of the Convention, hinted at military intervention if Greece
persisted in its failure to make provision for the repayment of the guaranteed loan
of 1833 in its budget. For example, Great Britain declared in 1846 that if so
disorderly an administration of Greek finances were suffered to continue, they
would feel themselves to be compelled by virtue of the treaty arrangements to
take such further measures as might appear to be necessary for insuring the
establishment of such a state of things as should afford a fair security to Great
Britain that the sums which ought to be applied and might be applied annually to
the service of the Loan, should no longer be squandered by negligent or corrupt
administrations, to the prejudice of British rights.37 Greece failed to resume debt
service until 1848, when the Eastern question and the looming Crimean War
started to overshadow the debt question.38
Over the next decade, the Greek debt question remained entangled in larger
foreign policy considerations. The major European powers were concerned that the
two orthodox states Greece and Russia might side against the Ottoman Empire
in the Crimean War (October 1853 to February 1856). At the time, millions of
Greeks were living in the Ottoman Empire, and Greece harboured the ambition of
eastward expansion, of a Greater Greece. France and Great Britain tried to
dissuade Greece from siding with Russia in the Crimean War. When persuasion
failed, they resorted to coercive measures, and threatened measures under Art. XII of
the 1832 London Treaty if Greece persisted in allying herself with Russia. Greeces
decision to ignore these warning infuriated the Great Powers.39 Great Britain and
France in particular were outraged that Greece was diverting substantial resources
that should be devoted to debt service in their view to weaken its ally, the Ottoman
Empire, in the war against Russia. In response, an Anglo-French military force
occupied the port of Piraeus in May 1854 forcing Otto to declare Greeces
neutrality in the Crimean War. The British and French military forces occupied
the port for three years.40
Greece asked the Great Powers on several occasions to withdraw the troops.
Great Britain and France insisted on the creation of an International Financial
Commission endowed with extensive supervisory and administrative powers over
Greek finances. Russia criticized this vexatious and wounding measure.41 In view
of Russian objections, France and Great Britain modified their plan by reducing it
36 Correspondence respecting the Failure of the Greek Government to Provide for the Payment of
Interest and Sinking Fund of the Greek Loan, Parl. Pap. (1846), LII, no. 1 Earl of Aberdeen to Sir
Edmund Lyons, 2 October 1845.
37 Correspondence respecting the Failure of the Greek Government to Provide for the Payment of
Interest and Sinking Fund of the Greek Loan, Parl. Pap, (1846), LII, no. 6 Earl of Aberdeen to Greek
government, 22 March 1846.
38 Levandis, supra note 1, 49; see further J. A. R. Marriott, The Eastern Question: An Historical
Study in European Diplomacy (Oxford University Press, 1917).
39 Correspondence respecting the Relations between Greece and Turkey, no. 250, Incl. I., 10 May
1845, Parliamentary Papers, vol. LXXII (1845).
40 Levandis, supra note 1, 50; Borchard, supra note 7, vol. II, 289.
41 Driault, Histoire diplomatique de la Gre
`ce de 1821 a` nos jours (Paris, 1925), vol. II, 416.
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to a mere Board of Control, whose powers were limited to making recommendations. The Board consisted of T. L. Wyse, A. Ogeroff and C. de Montherot, the
diplomatic representatives to Greece of France, Great Britain and Russia. While this
Board of Control was endowed with fewer powers than those that France and Great
Britain had originally in mind for such a body, the Board foreshadowed the
International Financial Commission that was established after the default in 1898.
The board investigated Greek finances from February 1857 to May 1859.42 Its
conclusions were startling: Greek public finances were characterised by a lack of
proper surveillance and control; inaccurate public accounts; a backward and
inequitable tax system, hampered by a lack of enforcement and widespread tax
arrears; the regular failure to provision any expenditure in the budget for debt
service; a general lack of transparency on property transactions given the absence of
a land register. The commission concluded its analysis with an assessment of
Greeces capacity to pay.
Greece paid a first instalment of the 1833 guaranteed loan in 1860, but then again
suspended payment until 1864, and in that year, sought to defer repayment of its
outstanding debt to the European powers to 1869. However, as a security and in return
for this concession, the great powers demanded, and Greece gave, one third of the
customs revenues of the port of Syra.43 In 1862, the Great Powers, with the agreement
of the Greek government, installed a Danish prince as the next monarch of Greece,
and gave a degree of debt relief in the form of personal donations to the King.44
In 1867, representatives of the independence loans and the Greek government
reached a first settlement that provided for the issuance of 1 mln. of new 5 %
bonds in complete discharge of the two loans. This equated to a large haircut, but
the negotiators felt that they had no choice given the perilous state of Greek
finances.45 However, both the bondholders and the Greek parliament rejected the
1867 settlement. For the Greek side, the crucial shortcoming was no new money
was offered by the existing creditors as part of the settlement. After several more
unsuccessful attempts, a settlement acceptable to both sides was finally concluded
eleven years later, in 1878. This settlement reduced the debt that had by now grown
to 10 mln. of new bonds with a face value of 1.2 mln.46
The 1870 s was the first, largely uneventful decade in the history of modern
Greece. In 1878, the Great Powers coaxed the Ottoman Empire and Greece to settle
their boundaries, though such a settlement through mediation of the Powers
remained elusive until 1881.47 Greece, still in default on the 18241825 loans,
returned to the European capital markets in 1879. The Law of 3 January 1879
authorized a loan of 60 mln. francs at 6 % interest. The bankers purchased one third
of the loan at 73.50 francs. The remaining two thirds were offered to the public at a
minimum price of 76. The net amount realized was 44 mln. francs.48
Over the course of the 1880 s, Greek public debt expanded rapidly, and the
government channelled most of the new borrowing into the Greek military to prepare
42

Levandis, supra note 1, 53; Borchard, supra note 9, vol. II, 291.
44 Borchard, supra note 9, vol. II, 291.
43
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for war against the Ottoman Empire in furtherance of Greeces territorial ambitions
(Greater Greece).49 The Law of 30 December 1880 authorized a further 120 mln.
loan at 5 % to meet extraordinary needs of the country. The lenders retained the
right of purchasing 60 mln. at 68 francs. Greece offered the remainder to the public at
74.60 francs. The net receipts of the government from the loan were 89 mln. francs.50
The Law of 4 January 1884 authorized a loan of 170 mln. francs at 5 % francs. The
issue price was 69.80 francs. The net amount realized was 70 mln. francs.51
The Law of 28 May 1887 authorized the so-called Monopoly loan of 1887 for 135
mln. francs, a particular momentous transaction in the annals of Greek public
finances. This loan paved the way for the International Financial Commission of
Control. The underwriters, Comptoir National dEscompte, the Privileged Bank of
Epiro-Thessaly52, the National Bank of Greece, the Bank of Constantinople and
Hambros Bank, besides benefitting from the hypothecation of certain monopoly
revenues, were empowered to establish a company with the object of collecting,
administering and supervising the assigned revenue streams, the so-called Societe de
Regie des Monopoles.53 It was designed as a temporary supervisory body, with a
lifespan limited to the maturity of the Monopoly Loan. The Regie made payments
directly to the Comptoir National dEscompte in Paris in gold or foreign exchange.54
Greece continued to borrow at a rapid clip at the end of the 1880s. The Law of
2 February 1889 authorized a loan of 155 mln. francs at 5 % interest, of which the
Greek government received 111 mln. francs.55 An Act of 19 April 1889 authorized a
further 90 mln. franc loan for the construction of the Piraeus Larissa Railway. The
net amount realized was 53 mln. francs.56 Greece had borrowed at a dizzying pace
in the 1880 s, and once economic conditions deteriorated, the next default resulted
from this rapid accumulation of sovereign debt in 1893. Greeces fiscal management
since the settlement of the independence loans in 1878 remained irresponsible.
Most of the new borrowing was devoted to financing chronic budget deficits, and
military expenditure continued to run high.57
The next section turns to the Greek default in 1893 and the establishment of the
IFC in 1898. Faced with an increasingly untenable fiscal position, Greece imposed a
70 % reduction in principal on her creditors in December 1893.
II. The default of 1893 and the establishment of the IFC

By the beginning of the 1890 s, 33 % of Greek budgetary receipts were devoted to 4
debt service.58 In 1891, a European recession hit an already vulnerable Greek
economy hard. Two thirds of Greeces export trade consisted of currant, and France
49

52 The bank held note-issuing privileges for Thessaly and Arta until 1899, Manfred Pohl, Handbook on the History of European Banks (1994), 524.
57 A. M. Andre
ades, Les Finances de la Gre`ce, Journal des Economistes, April 1915, 9; Borchard,
vol. II, supra note 9, 296.
58 Ibid.
50
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was the biggest market for currant which it used in its wine production. Greece was
particularly badly affected by the collapse in world commodity prices and agricultural prices and the recession in the core.59 Over the course of two years, the export
earnings from currant decreased from 60 mln. to 20 mln. francs.60 The lack of
diversification of the Greek economy, the economic slump on the continent and the
imposition of a substantial tariff on the importation of currant by France, followed
by Germany and Russia, led to a collapse in the confidence in the Greek drachma
from 1891 to 1893, In 1891, the Greek drachma lost 30 % with respect to the pound
and a further 60 % in 1893.61
Greek Prime Minister Charilaos Tricoupis, desperately seeking to avoid a sovereign default in the spring of 1892 attempted to negotiate a new loan in London.
Prior to extending any new funding, lenders insisted on an impartial audit of Greek
finances. Major Edward Fitzgerald Law, the British financial diplomat who was to
become an influential player in Greek public finances, was charged with drafting
this report. France was concerned that Law, as a Briton, would be partial to his
home country, to the disadvantage of France. The French government commissioned its own expert, Roux, to produce a similar report.
Rouxs report, though never published, was reportedly much more critical than
Laws report.62 Law gave several reasons for the weakness of the Greek public
finances: the large expenditures on the armed forces, over borrowing, a persistent
trade imbalance and fundamental weaknesses in tax collection and enforcement.
Laws task was essentially to certify whether Greece was insolvent, and he concluded
that Greece, though facing serious financial difficulties, was not insolvent. With
external financial assistance, the crisis could be overcome. He concluded on an
optimistic note: whatever mistakes may have been made in the past, have been due
to inexperience, or to the inherent difficulties encountered in shaping the destinies
of a new and democratic country, and the hope is justified that the teachings of
experience will enable Greek statesman to follow a safer course in the future
With rich soil, population remarkable for its frugality, and honest leaders, reasonable hopes may be entertained of bright prospects for the future of Greece.63 The
report had a bullish effect on the market for Greek sovereign debt.64
The Greek government recognised in 1893 that Greece required external financial
assistance to be able to return the country to a sustainable level of debt. In June
1893, Sotiropoulos, Tricoupis successor as Prime Minister, agreed on a 4 mln.
with Hambro Bank of London to issue funding bonds with interest at 5 %. The
interest on all the gold loans of the State, with the exception of the Monopoly loan
of 1887, was paid in bonds of the funding loans for the first 2 1/2 years.65
Tricoupis returned to power as Prime Minister on 11 November 1893 and
immediately annulled the funding agreement. Instead, he paid maturing debt from
the proceeds of the monopolies assigned to the funding bonds. Tricoupis passed the
59
Levandis, supra note 1.

Borchard, supra note 9, vol. II, 307.
61 J. Challey, La Grece contemporaine, Economiste Franais, June 3, 1888, 744.
63 Dipl. and Cons. Rep. on Trade and Finance, no. 1169 (1893) (Laws Report), 32.
64 The Financial News, 19 July 1894 (Everyone recollects the tone of [Laws] report and its
bullish effect on the market.)
65 Levandis, supra note 1, 7778; Borchard, supra note 9, vol. II, 305.
60
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laws of December 9 and 10, 1893, alleging that Greece was unable to service its
debts in full owing to prevailing high interest rates and force majeure. Greece was
again in default. The new prime minister proposed a 70 % reduction in the interest
payable on all gold loans, the suspension of sinking fund payments and for all
proceeds from the revenues hypothecated for the benefit of bondholders, including
those under the jurisdiction of the Societe de Regie, to be returned to the Greek
Finance Ministry. The British and French government and newspapers of the two
major creditors rejected this proposal outright.66
On 8 February 1894, the creditors asked Tricoupis how the Greek government
intended to meet its treaty obligations to repay the guaranteed loan of 1833. They
contended that any reduction of payments to bondholders should be temporary
only and that payments should be increased as soon as the Greeks financial
situation improved.67 They also insisted on new security for payment.68 Tricoupis
reassured the creditors that the debt restructuring measures were temporary only
and that Greece would resume debt service once the economy returned to its
normal state. The three creditor committees in France, Germany and Great Britain
rejected Greeces invocation of force majeure, fearing that it would cause great
uncertainty for all future bondholders about the repayment of sovereign debt. They
proposed that the Greek government give up control over specific revenue sources
pledged to servicing the debt. The Societe de Regie was to supervise and administer
these pledged revenues.69
Delyannis, Tricoupis successor as prime minister, strongly criticized the measures adopted by Tricoupis, especially the Law of 10 December 1893, and distanced
his government from it. He renegotiated with creditors for more than six months.
The proposals and counter proposals that emerged from these negotiations formed
the basis for the formation of the International Financial Commission one and a
half years later. They envisaged a high degree of supervision of Greek finances
rather than direct administration by the International Financial Commission,
building on the model of the 1887 Monopoly Loan. Notwithstanding, these
negotiations failed to conclude until 1898 as the Greek people regarded such an
intrusive form of supervision as an affront to their sovereignty and national
dignity,70 and because the German and French creditor committees rejected the
financial terms of the restructuring of the Greek debt.71
When Striet was elected as the new Chairman of the National Bank of Greece in
October 1896, the parties returned to the negotiation table.72 Yet the negotiations
dragged on for another two years, without much progress. It was only an unsuccessful war for Greece that enabled the negotiators to overcome the two main
stumbling blocks that had obstructed, namely first the question of allocating surplus
revenues and second, the participation of representatives of other states in the
Commission.
66

Corporation of Foreign Bondholders, Twenty-first Annual Report of the Council, 893 at 88.
68 Borchard, vol. II, supra note 9, 309.
67
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III. The War with the Ottoman Empire over Crete

The Cretan War of 1897 proved to be one of the most disastrous decisions for
Greece, in both economic and diplomatic terms. Its treasury was in dire straits. It
imposed a heavy burden on the Greek economy and left Greece politically isolated,
and with few friends.73 Greeces decision to fight the Ottoman Empire was greeted
with incredulity and dismay in the creditor countries. When the Turks overran
Thessaly, the Russian Ambassador to Greece advised Greece to appeal to the Great
Powers to bring about an armistice with the Ottoman Empire.
On 11 May 1897, the Greek Foreign Minister asked Austria-Hungary, France,
Germany, Great Britain, Italy and Russia, to mediate, indicating that Greece would
abide by their decision. The powers managed to broker an armistice, though the
Ottoman Empire insisted on a large indemnity payment.
It was only through the mediation of the European powers that an armistice was
reached, at a time when the Ottoman troops were about to take Athens. The prize
Greece had agreed to pay for the intervention of the Powers was its promise to
abide by any position of the Powers. Taken together, these factors gave the
European powers a perfect window of opportunity to take direct control of central
aspects of Greeces macroeconomic policy.74 France and Germany, alongside private
creditors pushed for an international commission of financial control. Greece,
under great pressure, buckled.
In the meantime, Greece again defaulted on its debts. Bondholder committees
sprang up in all three creditor countries, and calls for coercive measures soon
followed in the creditor countries. Private creditors were particularly strident in
Germany in calling for the government to intervene, leading the Greek charge
daffaires in Berlin to report back to Athens that Germany was a country
accustomed to playing the role of Master.75 Against the backdrop of growing
frustration among European governments and the wider public about the Greek
governments unwillingness to pay, official circles and the press mooted several
measures, including a comprehensive ban on the listing of any Greek securities on
European exchanges, and even the use of force to convince the apparently recalcitrant debtor that it should pay up.
Turkeys demand for war indemnity of 10 mln. incidentally raised the question
of Greek capacity to pay. The Great Powers seized this opportunity, and drew an
explicit linkage between the indemnity and the settlement of Greeces outstanding
debt in order to protect private creditors and the loans they themselves had made to
Greece against large-scale losses. Great Britain, France and Russia initially had some
concerns whether issue linkage was appropriate. Germany was adamant that
financial control be incorporated directly into the Peace Treaty. As a compromise,
France suggested an amendment to the Peace Treaty in the form of a protocol
annex. Yet in the end, all countries sided eventually with Germany on insisting on a
comprehensive regime of fiscal control.76
73

75 Quoted from Levandis, supra note 1, 83.
76 Borchard, supra note 9, vol. II, 313316; Levandis, supra note 1, 95.
74
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The Great powers appointed a group of financial experts, headed by Sir Edward
Law who had already written the widely noticed expert report on the Greek
economy in 1893, to carry out an audit of Greek finances and to establish her
ability to pay. Law, sympathetic as he was to the Greek cause, coupled with his
familiarity of the Greek financial situation, suggested 4 mln. Turkish pounds as an
appropriate indemnity, an amount which the Great Powers accepted.77
France and Germany, alongside private creditors pushed for an international
commission of financial control. Greece reluctantly agreed. The commission, consisting of a representative appointed by each major creditor (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 including control of public borrowing and a
reduction in the money supply.
Art. II of the Greco-Turkish Preliminaries of Peace Act provided for the establishment of the International Financial Commission: Greece shall pay to Turkey a war
indemnity of T 4,000,000. The necessary arrangement for facilitating the speedy
payment of the indemnity shall be made with the assent of the Powers in such a
manner as not to injure the rights acquired by the old creditors who hold bonds of
the Public Debt of Greece. For this purpose an International Commission of Control
shall be instituted at Athens, composed of Representatives of the Mediating Powers,
one member being appointed by each Power. The Hellenic Government shall pass a
law, which shall previously be accepted by the Powers, regulating the working of the
Commission and according to which the collection and employment of resources
sufficient for the service of the war indemnity loan and the other national debts shall
be placed under the absolute control of the said Commission.
Six weeks after signing the Greco-Turkish Peace Agreement, representatives of
the Great Powers in Athens drafted a system of Financial Control according to
Art. II of the Act. The Greek Parliament approved the Law of Control on 8 September 1897. At the last moment, the drafters removed the word control, and thereby
avoided further affront to Greek feelings. The Commission became known simply
as the International Financial Commission.78 It consisted of six representatives
from each of the major European creditor countries, and was endowed with much
more extensive powers than the Control Board created forty years earlier.
The Greek Parliament passed the implementing legislation, the Law of Control of
1898, in silence and without amendment. At the behest of Finance Minister Streit,
who took the view that Europes powerful countries had imposed a deal on Greece
that was highly disadvantageous, the minutes of the parliamentary meeting included
a reference to the Greek chamber of deputies cast[ing] its vote without freely
expressing its views, and that it submits to the confirmation of measures under
duress and coercion.79 The Law of Control implied that Greece delegated substantial parts of macroeconomic decision-making to an external body.
The Convention between the United Kingdom, France, Greece and Russia to
facilitate the conclusion of a loan by the Greek Government signed at Paris on
29 March 1898 sets out the framework for a major loan that the Great Powers
77
Morison, supra note 1, 206.

Morison, supra note 1, 214.
79 Quoted from Levandis, supra note 1, 99.
78
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extended to a war-torn Greece. As the Preamble suggested, the main purpose of the
loan was to help Greece pay the war indemnity due to the Ottoman Empire under
Artt. II and VIII of the Treaty of Peace concluded at Constantinople in 1897
between Greece and the Ottoman Empire. The remainder was to service the loan by
the Major Powers.
Baron Mohrenheimm, the Russian Ambassador to Paris, suggested a tripartite
joint guarantee to the France and Great Britain. After long negotiations, the three
Powers agreed that the indemnity loan amount would be 6.8 mln. (equivalent to
170 mln. francs or 63.75 mln. roubles with an interest rate of 2.5 % (art. I of the
Convention). Art. II provided that only 152 mln. francs was to be disbursed
immediately and the balance be disbursed according to Greek needs.80 Greece paid
94 mln. francs to the Ottoman Empire as a war indemnity. The remaining balance
was to be exclusively used for the liquidation of existing debt obligations and the
conversion of the floating debt.81 On 10 May 1898, the loan was floated in all the
main European financial centres. Around 30 banks participated in the offering.
Art. IV of the Convention stipulated the conditions for servicing the loan. The loan
was secured by a fixed annuity, calculated including the amortization at 3.60 % of
the nominal capital, and furnished by the revenues assigned to the service of the
Hellenic Public Debt.
The third section turns to how the IFC operated, with particular attention to the
powers that were delegated to the IFC.
IV. The operation of the IFC

The Law of Control of 1898 established the IFC with absolute control over the
collection and employment of revenues sufficient for the service of the war
indemnity loan and the other national debt. It provided for the appointment as
members of the Commission of six representatives from the powers (Russia, France,
GB, Austria-Hungary, Italy), who had been granted ambassadorial status.82 The IFC
enjoyed complete independence from the Greek government and immunity under
Greek and international law. The IFCs main task was to collect and employ the
revenues assigned to the service of both the 1898 loan and the guaranteed loan of
1833 on, as well as all six foreign gold loans contracted between 188193.83
The far-reaching powers of the Commission in managing Greek finances appear
also in Art. 7 of the Law of Control, which placed the proceeds of the loan entirely
at the disposal of the International Commission84. The Greek government could
suggest how these proceeds should be used, but ultimate control rested with the
IFC. Any balance that remained after debt service which the Greek government
was entitled to could only be spent with the agreement of the IFC. Moreover, the
80 1898 [C.8856] Treaty series. no. 9. 1898. Convention between the United Kingdom, France,
Greece, and Russia. To facilitate the conclusion of a loan by the Greek government, signed at Paris,
29 March 1898.
81 Morison, supra note 3 at 101.
83 The arrangements are also described in the Report of the Financial Commission, Greece no. 2
(1898); Affaires dOrient, 1898 (Travaux de la Commission Internationale [B2] Tableau).
84 1898 [C.8778] Greece. no. 1 (1898), Dispatch from Her Majestys minister at Athens.
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IFC could veto any decision of the Greek Council of Ministers that it thought ran
counter to the interests of the creditors.85
The revenues for debt service came from monopolies that had been specifically
pledged for this purpose and custom duties in several Greek ports.86 18 % of the
revenues were dedicated to the administrative expenses of the IFC, and the
remainder was split between 60 % for debt service and 40 % for the general Greek
treasury. Chapter IV of the Law of Control detailed the revenue streams placed at
the disposal of the IFC: (a) the customs duties of the ports of Piraeus, Volos, Corfu,
Lavrion and Patra; (b) State monopolies on kerosene, salt, matches, playing cards,
emery from Naxos and cigarette paper; and (c) the stamp duties and the duty on
tobacco consumption. Chapter V also set out the procedure for collecting the
assigned revenues. The IFC collected the revenues through an ad hoc company
the Regie that was given a new lease of life. It was subordinated to the IFCs direct
control. Its duty was to inspect the revenue services, to object against unjustified
dismissals of employees and modifications of the laws and regulations affecting the
assigned revenues.
Chapter VII of the Law of Control provided how the proceeds of the revenues
assigned for the service of the gold loans were to be employed.87 Once the revenues
were collected, they were used to buy foreign exchange until the half-yearly coupon
payments were covered. The National Bank of Greece was the paying agent, and
later on assumed by the Bank of Greece. If the revenues collected exceeded the
maturing obligations, the balance was transferred to the National Bank for the
service of specified domestic loans. Any excess balances were to be transferred to
the Greek government. In addition, the commission was with a large degree of
control over the issues of treasury bills and paper money particularly important
from the point of view of creditors given Greeces history of hyperinflation and
forced currency issuances since independence.88 In addition, taxes could only be
modified with the agreement of the IFC.
Disagreements between the IFC and the Greek government could be referred to
an arbitrator, who was to be appointed by the President of the Swiss Confederation.89 Art. 14 of the law of control provided:
In case of disagreement between the International Commission and the Hellenic
Government with regard to the interpretation or execution of the present Law and
the Royal Decrees issued in conformity with its provisions, recourse shall be had to
arbitration. If the parties do not agree in the choice of a sole Arbitrator, they shall
each appoint an Arbitrator within one month, counting from the day on which
arbitration is demanded. If the Arbitrators so designated do not succeed in coming
to an agreement, the appointment of a third Arbitrator shall be entrusted by the
parties, or by one of them, to the choice of the President of the Swiss Confederation.
The Arbitral Award shall always be final.
85
Borchard, supra note 9, vol. II, 337.

George J. Andreopoulos, The International Financial Commission and Anglo-Greek Relations
(19281933) 31 (1988) The Historical Journal, 341364.
87 1898 [C.8818] [C.8849] Greece, no. 2 (1898), Correspondence relating to the finances of
Greece.
88 Andreopoulos, supra note 86, 341364.
89 Ibid.
86
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In the 1920 s, the IFC insisted that bondholders be paid in gold, whereas Greece
contended that only the equivalent in gold francs of a fixed sum was due to
bondholders. The European powers and Greece could not agree on a presiding
arbitrator to settle the dispute that arose because of the drachmas depreciation
from 19221926. As a result of this depreciation, the prospective payments to the
holders of Greek government bonds were considerably reduced. The Greek bonds
in question were denominated in gold francs, and the IFC had earlier adopted the
practice of calculating payments due to bondholders in gold francs. The position of
the Greek government was that the payments to its bondholders should be limited
to the value of the paper franc in 1926. The arbitral tribunal sided with Greece,
finding that the IFC applied a method of currency conversion that went against the
spirit of the Law of Control that led to much higher payments by Greece. Nevertheless, the arbitrator increased the annual payments by 20 % to account for the
high inflation prevailing in Greece at the time.90
The mandate of the IFC changed over time. It began to borrow on behalf of the
Greek government. Beginning with the railway loan in 1900, eight out of the fifteen
major public bonds issued internationally between 1900 and 1932, were entrusted to
the Commission. As its sphere of activity was broadened, the IFC soon required
new revenue streams. As a result of the 1914 loan, the assigned revenues were
supplemented with the import duties collected in the ports at Salonica and Cavalla,
while as a result of the 1924 refugee loan, the assigned revenues were enlarged to
include (a) the salt, playing cards, cigarette paper and matches monopolies in New
Greece; (b) alcohol duty in all of Greece; (c) stamp duties and tobacco duty in New
Greece; and (d) the import duties of the customs of Canea, Mytilene, Chios, Samos,
Syra and Candia.91
After World War I, only three country representatives remained on the Commission: one representative from France, Great Britain and Italy. Germany and now
dissolved Austria-Hungary were no longer represented on the IFC. In large part
because of the presence of the IFC, Greece did not default on its external debt in the
1930 s, and paid its debt service until shortly before Germany occupied Greece in
World War II.
The conclusion puts the experience with the IFC in Greece into broader context.
V. Conclusion
External interference in Greek public finance has been a perennial theme since
Greek independence in 1832. The IFC is a leading example among several others of
quasi-receivership of countries a mechanism for creditors to closely intervene in
the financial and economic affairs of a country by creditor countries.92 This extreme
form of intervention that led de facto to the suspension of economic sovereignty for
a limited period of time was a fairly common response to sovereign financial
distress at the turn of the 20th century for countries on the periphery. Creditors
established similar institutions in other peripheral countries, such as Egypt, the
90
Waibel, Sovereign Defaults before International Courts and Tribunals (2011), 45.
Andreopoulos, supra note 86, 342.
92 See generally Waibel, supra note 90, 4257.
91
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19
Ottoman Empire, Tunisia and Haiti. The IFC, alongside the Ottoman Council of
the Public Debt, represents the most elaborate system of financial control.
The Ottoman Empire had defaulted on its debt twice at the end of the nineteenth
century, in 1875 and 1876, following the costly Crimean War. As a result of the first
default, creditors reached an agreement with the Ottoman government, which
created the Ottoman Debt Council, a body charged with supervising payments of
the restructured debt and protecting the interests of bondholders.93 When revenue
accrued by the Council swelled, in 1903, due to a back payment made by Bulgaria
on an outstanding annuity, the Council increased the interest rate payable to
bondholders by a quarter percent. After an arbitral decision had affirmed the ability
of the Council to alter the interest rate payable on debt, Turkey promptly defaulted
upon such payments.
Over the course of its long history, the IFC in Greece failed to gain much respect
of the Greek government or the Greek people. Rather, it served as a constant
reminder of Greeces financial mismanagement and dependence on European
powers. At the end of the 19th century, the major powers universally supported the
establishment of the IFC. History has taken a far less benign view of this precursor
of an international organization, even though it appears to have protected creditors
rather well.
Writing in 1944, Levantis provides the following assessment of the IFCs work:
During all the negotiations, the economic and financial rehabilitation of Greece
were only incidentally considered. Instead of considering the debt problem in broad
aspects and of adopting measures to eradicate the endemic disease with which
Greek finances were perennially afflicted, they introduced half measures, inadequate to remedy the situation.94
The politics of the IFCs operation were the seeds of its own downfall. It became
increasingly to be seen, rightly or wrongly, as a mechanism for the subordination of
Greece. It also mirrored the trend at the end of the 19th century of dividing the
world into the core, constituted by the civilized imperial powers and the periphery
terms that are often associated with 19th century European imperialism and the
nowadays wholly discrete view that only some countries enjoy sovereignty because
they are civilized countries. Serious signs of a core-periphery division have reappeared in the Eurozone crisis more than a hundred years later. These fissures are
the biggest political challenge to putting the Eurozone on a more sustainable
footing.
93 D. C. Blaisdell, European Financial Control in the Ottoman Empire: A Study of the Establishment, Activities, and Significance of the Administration of the Ottoman Public Debt (Columbia
University Press, 1929).
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O:/Beck/Paulus/3d/CHAPTER 1.3d from 06.05.2014 09:00:07

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Chapter 1: The Historical Experience and Economics of Sovereign Debt

I. Greek independence in 1832 and borrowing abroad

Reemers Publishing Services GmbH

A. Echoes of History:The International Financial Commission in Greece

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Chapter 1: The Historical Experience and Economics of Sovereign Debt

Borchard, supra note 9, vol. I, p. 283.

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A. Echoes of History:The International Financial Commission in Greece

moreover marred by mismanagement and corruption.24 The English press severely

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Chapter 1: The Historical Experience and Economics of Sovereign Debt

Reemers Publishing Services GmbH

A. Echoes of History:The International Financial Commission in Greece

Reemers Publishing Services GmbH

Chapter 1: The Historical Experience and Economics of Sovereign Debt

Levandis, supra note 1, 51.

Reemers Publishing Services GmbH

A. Echoes of History:The International Financial Commission in Greece

II. The default of 1893 and the establishment of the IFC

Levandis, supra note 1, 66.

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Chapter 1: The Historical Experience and Economics of Sovereign Debt

Levandis, supra note 1.

Reemers Publishing Services GmbH

A. Echoes of History:The International Financial Commission in Greece

Levandis, supra note 1, 79.

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Chapter 1: The Historical Experience and Economics of Sovereign Debt

III. The War with the Ottoman Empire over Crete

Levandis, supra note 1, 88.

Reemers Publishing Services GmbH

A. Echoes of History:The International Financial Commission in Greece

Morison, supra note 1, 206.

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Chapter 1: The Historical Experience and Economics of Sovereign Debt

IV. The operation of the IFC

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A. Echoes of History:The International Financial Commission in Greece

Borchard, supra note 9, vol. II, 337.

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Chapter 1: The Historical Experience and Economics of Sovereign Debt

Reemers Publishing Services GmbH

A. Echoes of History:The International Financial Commission in Greece

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