Biggest credit default in history buys Greece time

After months of wrangling, lenders have agreed to accept losses on their loans to debt-stricken Greece. It’s the biggest default in history – can history tell us what to expect?

Every country has debts. But what happens when it cannot afford to repay them? Greece has been struggling with this question since 2008, and at times the crisis has threatened to contaminate the entire European economy. Finally, a solution has been reached – at least for now.

On Friday most of the institutions who had lent money to Greece accepted that they would never be fully repaid. Lenders who still demanded their dues were simply informed that they would have to share Greece’s losses. Greece cannot pay, so it will not pay – it has defaulted on its debt.

At €105 billion, this was the biggest ‘debt restructuring’ in history. Just a few years ago this event would have provoked panic; yet such is the state of crisis in Europe that it was welcomed with relief. ‘Today,’ said French President Sarkozy, ‘the problem is solved.’ Does history justify this optimism? There is no shortage of precedents.

Greece was also the arena of the first recorded default when, in the 4th Century BC, several states found themselves mired in debt to a temple of Apollo.

In 1340, Edward III of England owed enormous debts to Italian money lenders. But, like most European monarchs, he was more committed to military glory than financial prudence. His solution was not an ‘orderly default’ like Greece’s: since he was a king and his creditors were not, he simply refused to pay them. They ended up in prison, and he ended up in a war with France.

In the 16th Century, Spain was the greatest world power. Floods of gold and silver from the Americas had made it stupendously rich – but as imports of precious metals became less valuable, Spain suffered a crippling string of defaults. Ultimately, wealth and power shifted to Northern Europe.

This is one of the greatest worries about Greece’s situation. Even after the next injection of bailout cash, it may still not have enough to pay its remaining debts. If this happens, European lenders could also suffer, leading to a domino effect that triggers the decline of the entire region.

All debts are off...

Some, including Sarkozy, are hopeful that a way forward has been found. Hard times lie ahead, they admit, but Greece and Europe have shown that they can work through them together. This is the momentous first step on the road to recovery.

This is no cause for celebration, say others – it is an ominous precedent. Now that Greece has defaulted, what is to stop it doing so again? And other struggling European economies may follow. If more economically powerful countries like Italy or Spain go bankrupt, Europe could be on course for a bitter depression.

You Decide

  1. Can history help us to make better decisions today?
  2. Are irresponsible borrowers more blameworthy than irresponsible lenders?


  1. Some people say that Greece may still have to introduce a new currency. Design a banknote for a currency of your own.
  2. Research a historical financial crisis and compare it to the one the world is experiencing at the moment. Which factors are similar and which are different?

Some People Say...

“It’s wrong to lend money for profit.”

What do you think?

Q & A

What does this mean for other countries?
Foreign banks have taken a hit – most of them French or German, though the UK is also affected. These banks are far from the situation of Edward III’s unfortunate financiers, but many worry that worse could follow.
How much worse?
In the worst case, a string of defaults could lead to the Euro being devalued. A long and deep recession might then afflict Europe, with ripples being felt across the world. This would likely lead to political and social unrest as well, of the kind already being experienced on the streets of Athens, where rioting is rife. Some believe this nightmare scenario is a serious possibility – but it is still some way off yet.

Word Watch

President Sarkozy
Sarkozy played a major role in thrashing out the deal. With polls suggesting he may lose the French presidency in next month’s election, he has a particular interest in painting the default as a triumph.
Temple of Apollo
Greek temples were very rich and took on a number of financial roles, including loans and currency exchange. They have sometimes been seen as early banks. Apollo was the Greek sun god, and also found time to be god of music, truth and medicine among other things.
Italian money lenders
For much of the Middle Ages, Italian cities like Florence, Venice and Genoa were the financial capitals of Europe. They were packed with merchants travelling between Europe and the Middle East. This was where much of modern banking was invented, like using notes of exchange in place of coins.
Became less valuable
Spain was importing so many valuable metals to Europe in the 16th and 17th Centuries that it lost much of its value. Some historians believe this caused an enormous regional financial crisis.

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