Invading a country with high debt

Question

I thought about this question during the height of the Greek economic crisis several years ago. The media was saying that Greece had run out of money, having used funds that had been set aside for a natural disaster, and they really badly needed a loan.

Suppose that during this period, an alien spaceship crash-landed in Greece and the aliens proceeded to invade the country. Since Greece has no money (= cannot buy weapons, ammunition, pay their soldiers, etc), and it cannot borrow (since nobody being willing to lend Greece money was the cause of economic crisis) does it mean Greece will be easily conquered? If the answer is no, where will Greece get the money to defend itself from?

I'm asking this as an economics question, so I'm not thinking of stuff such as whether NATO intervenes or what the technological capabilities of the aliens are.

Answer 1

The situation in Greece is complicated because it is part of the euro area, and NATO. It would presumably receive external aid.

But if you want a historical example, you could look at the tail end of the Depression in the 1930s. Although debt levels were not high by modern standards, governments had difficulty because of the Gold Standard. As countries moved to build up their militaries, they broke their pegs to gold. This gave them the ability to run large deficits to pay for the military spending.

Eichengreen’s “Golden Fetters” gives an overview of that era.

(The problem Greece faces that it is locked into an exchange rate system,like the Gold Standard, but it is even harder to get out of.)

In summary, the usual response is to break any existing currency pegs, default on foreign currency debt, and use deficit finance (and inflation) to handle the emergency.