Yields on Greek 10-year government bonds have recently fallen below 1 percent, something that is an achievement, especially after the financial crisis of the past decade, when returns on 10-year bonds reached 36.5 percent.
This reminds us of the famous loan of independence, which was first concluded by Greece before being recognized as a free country.
Many academics and politicians call this loan from Britain “burdensome” or “robbery,” and an example of the exploitation of a poor country by foreign bankers.
One might wonder whether this loan is indeed a “cruel exploitation” of the state, and whether Greek representatives are stupid to agree to their terms.
There are two loans.
The first loan was concluded in 1824, for 36 years (underwriters: Loughnan & Sons and ‘Brien), with a nominal value of £ 800,000. The amount disbursed is £ 472,000 or 59 percent of the face value. The loan was negotiated from Greece by Ioannis Orlandos and Andreas Louriotis.
The second loan was concluded in 1825, for 36 years (underwriter: Ricardo Brothers), and a nominal value of £ 2,000,000. The amount disbursed is £ 1,100,000 or 55.5 percent of the face value.
Both loans are bonds with an interest rate of 5 percent and an annual amortization rate of 1 percent (both at nominal amount). In both cases, the first two-year interest payment is paid upfront.
The second loan contract also provides the use of £ 250,000 to pay a portion of the first loan to support its market value in the secondary market.
We will compare the terms of this loan with what is currently in force with Greek government bonds.
To repay capital, both contracts provide payment of 1 percent of nominal capital every year for 36 years. Of course, the total amount of these installments amounts to 36 percent of the capital. However, if (theoretically) the payment is deposited annually into an interest-bearing account with a secure interest rate according to market standards (5 percent), this deposit will reach 100 percent of capital at the end of 36 years.
This method calculates the final value of recurring payments to the account (sinking fund) of X over Y years, in which the deposited amount is combined every year at a safe interest rate, valid even today. The only difference is that the current safe level (eg the interest rate of the Bundesbank or US bonds) is around 3 percent or less, while it is 5 percent.
The loan interest rate at that time, which fluctuated depending on the risk of each investment, was generally almost double that of today. This is also supported by the related bibliography.
What might confuse readers at the moment is the fact that instead of receiving £ 800,000, borrowers (ie the revolutionary Greek government) only cashed in 59 percent (£ 472,000).
Many think that the difference is being held back by extortion and, therefore, that the loan is a “robbery.” Are Greek rebels falling victim to foreign Shylocks?
Of course not. Loan terms must be adjusted according to the risk.
At present, loan requirements are adjusted according to the risks they pose, through the interest rate. The higher the risk, and the longer the repayment period, the higher the loan rate.
However, at that time, the market did something different.
Loan contracts provide a secure interest rate (5 percent) and adjustments, depending on the risk, are achieved by buying bonds at prices below par. This practice is used in part even today.
In other words, this is what also happens today in the secondary bond market, and the interest rate received by creditors is the “yield” of bonds.
As a result, the real interest rate for the first loan is not a nominal 5 percent, but around 8.47 percent (5 / 0.59).
In addition, under the terms of the loan, Greece pays annually 1 percent of the nominal amount of the loan for capital amortization, while it actually has to pay only 0.59 percent to pay the amount actually cashed as a loan. To account for that, we add this additional cost of 0.70 percent in real capital to an interest rate of 8.47 percent, resulting in a real interest rate of 9.17 percent.
Thus, in the case of the second loan, the real interest rate is 9.80 percent.
In conclusion, we reduce the following:
– The first loan was the issuance of 36-year bonds with a total value of £ 472,000 with an interest rate of 9.17 percent. That is not a loan of £ 800,000 in current terms, of which £ 328,000 is too withheld by the lender.
– The second loan is also a 36-year bond issue with a total value of £ 1.1 million with an interest rate of 9.80 percent. That’s not £ 2,000,000, and again in this case the same applies to the £ 900,000 difference.
These terms, and especially the real interest rate, are not at all “robbery”, especially when we consider the following:
(A) guarantees that the borrower can attend:
The prospective borrower is not even a recognized country, but only a representative of a “rebel state” with ambitions to form a country, and who, after some initial success, entered a civil war. In parallel, the Ottoman Empire called this “rebel country” a “terrorist,” while the Holy Alliance saw it as a serious threat to peace in Europe.
(B) that the overall level of international interest rates at that time was higher than now, as evidenced by the fact that the “safe rate” was 5 percent, whereas today it is about half that level. Therefore, the (real) interest rate of 9.5 percent, applied to Greece, corresponds to an interest rate of 5.5-6 percent at the current standard. These terms are very profitable, at least in the current terms, especially when it comes to 36-year bonds.
In addition, the best evidence that these loan terms are not burdensome, but instead, is as follows. One of the conditions for the second loan is to pay a portion of the first loan with a total face value of £ 250,000.
This was done, and the redemption price was £ 113,200 in the first stage, which is £ 45.3 for each £ 100 bond.
Regardless of whether this repurchase is recommended or not, we note that one year after its issuance, the price of the first loan on the free market (or secondary) has dropped from £ 59 to £ 45.4 (ie they are depreciated by 23 percent) and respectively , bond yields rose from 9.5 percent to 11.9 percent.
So the “market” has assessed that Greek bonds are overvalued, and that their real value, in line with the risk represented by these bonds, is £ 45.4 rather than £ 59.
Therefore, the first loan lenders (ie original bond buyers) suffer losses, and not the borrower. We also must not forget that lenders are not actually “bad” bankers, who are quite eager to get a commission, but bondholders, who are mostly philhellenes (and most of them are simple citizens), who want to help the rebel Greeks and to honor Lord Byron’s memories and struggles.
It should also be noted that all loans approved by Latin American countries with British banks between 1822 and 1825 have the same structure. In general, terms of loans to Greece are better. Indicatively, all loans (with the exception of Mexico’s first loans) have an initial interest rate of 6 percent, not 5 percent, while important commissions are paid.
For example, the first loan requirement of £ 3,200,000 to Mexico from a B.A bank. Goldsmith & Co. in 1824 is as follows. The price to buy a £ 100 bond is £ 58. The interest rate is 5 percent. The sale generated £ 1,850,000.
However, a commission of £ 750,000 was deducted. So Mexico finally got £ 1.1 million. Comparison with Greek loan terms is very easy. Remember that after the revolution that began in 1810, Mexico became an independent country on August 24, 1821.
The final conclusion is that the famous “English loan” is not robbery at all, and those who negotiate it are not traitors or fools. In fact, they are assisted by philhellenes, worthy financial advisers.
It is likely that subsequent loan management is not appropriate, and it seems that some irregularities occur; but the loan itself has reasonable requirements, given all the parameters.
The problem with these loans is not their requirements but the inability of Greece to use funds to support the struggle, and then to serve them during the following years through wise financial management.
It should also be noted several other parameters related to this loan. Beyond the financial aspect, these loans were the strongest political act of official recognition of the rebel Greeks and the prospect of an independent Greek state being founded.
The loan was made possible when the great British politician and philhellene George Canning took the office of foreign minister in England.
Canning drastically changed the policies of his predecessor, Viscount Castlereagh. He acknowledged Greece as a warring country and gave the green light for the City of London to issue loans to Greece.
In any event, even if the Greeks had made the best use of their loans, history has shown that the liberation of the nation requires a decisive naval battle in Navarino.
This battle involved 29 of the best ships of the three allies with the most experienced personnel on board, under the command of the British admiral Sir Edward Codrington, who destroyed a fleet of 90 Turkish-Egyptian ships.
In addition, to persuade Ibrahim Pasha to leave Greece, it took another 10 months and the presence of a regular army of 15,000 under General Maison, and, in parallel, continuous negotiations between Codrington and Egypt to reach a final agreement only in July 1828.
Has anyone ever calculated the value of support that Greece received from its allies, and first from England? How much loans does Greece have to receive, and what blood tax does the Greeks have to pay themselves to get freedom?
If all of this is taken into account, then we can conclude that this loan was almost haphazard, and that the assistance and support that Greece finally received was, as it is now, unprecedented internationally.
The Greeks owe their support to the philhellenism and the admiration expressed by the Western world for Greek culture and heritage that have for centuries originated from the marbles of the Acropolis of Athens.
Nikos Apostolidis, former professor at Athens National Technical University, and Constantinos Velentzas are members of the Community Advisory Council for Hellenism and Philhellenism (www.eefshp.org).
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