Lessons from the Greek debt crisis

Greece, a small country in South Europe, has not only defaulted on loans, and but has also threatened not to stick to the austerity measures suggested by its creditors — the International Monetary Fund (IMF), European Union and the European Central Bank.

As a result, it is on the verge of an exit from European Union, triggering fears of more such defaults and a deeper financial crisis in the global economy. As politicians and economists in Europe and across the world are busy finding a solution to the Greek crisis — aptly named Greek Tragedy — it would be worthwhile for individual borrowers to learn some lessons on managing debt from the crisis.

EXPENSES WAY BEYOND INCOME

When Greece’s GDP was growing at a decent pace (at an average 4.2 per cent from 2000 to 2007), it borrowed heavily to finance its budget deficits, which remained over 4 per cent since 2002. Lesson for individuals: Do not spend beyond your means even if the times are good for you. Do not lose sight of the debt levels. If you are regularly hitting the credit limit of your credit cards, or have too many personal loans, you should know there is a problem with your finances. Overindulgence and ignorance can lead to a debt trap.

DEBT LEVELS BEYOND REPAYMENT CAPACITY

Greece’s debt-to-GDP ratio (debt as a percentage of the country’s gross domestic product), which was just over 100 per cent from 2000 to 2007, swelled to 177 per cent in 2014. The shooting of debt levels was mainly on account of its faltering GDP growth.

Lesson for individuals: There is a thin line between smart debt management and a debt trap. Do not cross that line. If you have taken loans and are paying it back in monthly installments, always try to keep our EMIs below 50 per cent of your salary. After paying all your EMIs, credit card loans and other expenses, if you are not able to save any money at the end of the month, cut expenses.

UNNECESSARY EXPENSES

Greece’s spending on public pension is 16 per cent of its GDP, one of the highest in the Euro zone. Pension is not an unnecessary expense, but Greece has been too generous with its pension beneficiaries. The country spends 2.3 per cent of its GDP on military! For a country that is laden with debt, it should have cut the defense budget.

Lesson for individuals: There are expenses you can dispense with. Look carefully at your credit card bills. See how often you have eaten outside, watched movies or frequented pubs and bars. See if there is credit card spending you have converted into EMIs. If your card bill has more entries of eateries, mobile stores and multiplexes than utility bills and grocery shops, you know you have been splurging.

LOANS: A SUBSTITUTE FOR INCOME GENERATION

There was a time when Greece was financing its huge budget deficit by borrowing money. As money was flowing easily, it did not try to improve its income generation capability. Between 2004 and 2009, the government’s expenditure increased by 87 per cent against an increase in tax revenue of 31 per cent. Lesson for individuals: When times are good, banks and other financial institutions approach you with easy loan offers — be it personal loans or credit cards. Do not get carried away by these offers. Differentiate between a good and a bad loan. Ideally, any loan for creation of assets (home loan, business loan) or a loan for learning new skills (education loan) are good loans, while loans taken for buying expensive gadgets and going for vacations are bad loans.

EXCLUSIVE CLUB? PAY THE PRICE

The problem with Greece has been its inability to devalue its currency to increase exports and investments. Greece is a part of the European Union, which follows a uniform currency. This means the member countries have no flexibility in terms of tweaking their exchange rates to attract investment or exports.

Lesson for individuals: Peer pressure often forces individuals to act in a certain way and live a life that can be beyond your budget. If you are already laden with loans, and you need to cut expenses by sacrificing a certain “lifestyle”, do not shy away from doing it. Take harsh measures — sell the expensive car, use public transport for going to office, buy clothes and accessories of cheaper brands, and if needed, avoid company that requires you to live beyond your means.

POOR DATA QUALITY, LOSING CREDIBILITY

Greece has not only shown indiscretion in managing its expenses and debt, it has overstated growth data and understated its fiscal deficit and expenses. It even hid some of the debts in its books to avail new loans. This led to drop in value of its bonds and its overall credit rating.

Lesson for individuals: Do not avail loan by forging income statements and not disclosing outstanding loans (the latter is not now less likely given better information sharing mechanism among banks). Such acts can not only land you in jail but also get you blacklisted by the banks. If you have taken a loan, ensure you make timely repayments, so as not to ruin your credit rating.