An Ancient Greek Debt Solution

SEPTEMBER 28, 2011, 5:39 AM ET

The Wall Street Journal

The blade of sovereign default is hanging unsteadily over the neck of the euro zone. Greece will be first – of this investors are certain. But fears are rising that Ireland and Portugal will follow soon after.

So what should be done?

What’s past is prologue: History is littered with sovereign defaults. For some answers, let’s go back — WAY back.

The first recorded sovereign default appears to have happened in, um, Greece, according to “Foreign Bonds: An Autopsy,” by Max Winkler and Thomas H. Healy. (In fairness to Greece, the first recorded instances of many things are in Greece. )

The year was around 400 B.C.; Plato was an up-and-coming young philosopher; and Dionysius of Syracuse*, a noted tyrant, had a problem: He’d borrowed too much money from his subjects.

Dionysius’s solution was to appeal to the solidarity of tribes all across Europe to pool their money into a giant pot that would repay Dionysius’s debts.

Not really. Actually, Dionysius ordered all money handed over to the government upon pain of death. He then reminted every coin, turning each one-drachma coin into a two-drachmae coin. The tyrant was then able to pay all his debts in full; maybe no one noticed that the real value of the coinage had been halved.

If that’s the kind of decisive policy that investors are looking for to solve the euro-zone debt crisis, the Lisbon Treaty will need a few amendments.

It should be noted that Dionysius enjoyed several advantages over the contemporary Greek state. First, he was a tyrant and could largely do what he liked. Second, all his debts were domestically held. He hadn’t borrowed money from barbarian tribes in the northern wilderness, for example. The Greek government, on the other hand, has creditors scattered across the euro zone.

Greece has the advantage that it now uses a fiat currency and thus wouldn’t need to shoulder the burden of actually rounding up euros. The European Central Bank could simply print more of them. But the tribes that control the ECB are opposed to running the printing presses at full tilt.

You might object that this isn’t an example of default but rather of inflation through currency devaluation. Maybe so (take it up with Winkler and Healy, who are dead). But it’s interesting that even a tyrant like Dionysius thought it preferable to devalue the currency by half rather than repay only half the nominal value of his debts.

That speaks to the ease of dealing with over-indebtedness through inflation rather than nominal haircuts. Perhaps Dionysius would have faced a popular revolt had he refused to repay the face value of the notes.

Instead, the inflation strategy allowed him to continue his reign of terror on the peoples of the Mediterranean until the ripe old age of 65, when he was either poisoned by his son or drank himself to death in ecstasy after hearing that a play he wrote, “The Ransom of Hector,” won a competition at the Lanaean festival in Athens.

You gotta go somehow.

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*Yes, Syracuse is in present-day Sicily, but it was a Greek city at the time.