Could a competent financial adviser have saved Greece?
Written by Trevor Keidan on August 31, 2015.
It is difficult not to have some sympathy for the tragic and disastrous financial muddle that the Greeks finds itself in. Nevertheless, it is clear that the country’s ministers ignored some of the fundamental maxims of good financial planning. Perhaps a competent financial adviser could have saved Greece!
I jest, but there are certainly some lessons to be learnt from the Greek tragedy which you can apply to your own personal financial situation in order to avoid a similar personal disaster. Here are six:
1. Don’t delude yourself (or lenders) about your financial position
I was acquainted with a couple who looked nicely solvent when they applied for a mortgage, except that they had tippexed out the minuses before copying the statements which they sent to the mortgage company! The mortgage was granted but the couple quickly got into financial hot water when they found themselves unable to meet their monthly repayments.
By all accounts Greece performed similar sleight of hand to magically make a large part of their deficit ‘disappear’ in order to fulfil the EU borrowing criteria of under 3% of GDP to qualify for membership of the euro. Now the consequences of that deception are being felt by the Greek nation who are suffering under the burden of crippling austerity measures imposed as terms of consecutive bailouts.
A good financial plan needs to be grounded in reality, and that means facing up to your actual financial situation. The mortgage fraudsters failed to do that, and so did Greece, which is now paying a heavy price for two decades of delusion.
2. Don’t borrow more than you can afford
At the crux of the Greek tragedy is the fact that the country borrowed heavily after it entered the euro, benefitting from the lower interest rates on offer once it was a part of the Eurozone. The problem was that Greece, just like the mortgage embezzlers, could not afford to make the repayments.
Debt is not always bad but it is essential to distinguish between good debt and bad debt. Loans that are tailored to your ability to pay and which add value to your life – such as a mortgage on a house which will hopefully appreciate in value over the long term or a student loan with low interest rates enabling you to further your job prospects and earn a higher salary – are examples of good debt. Lying to attain credit which you can’t afford to pay back is not!
3. Always keep an emergency reserve
I advise all my clients to keep an easily accessible emergency fund equivalent to at least six months of their living expenses in case of a disaster. For an individual that disaster could be losing your job or suffering from an illness which prevents you from working. In Greece’s case it was took the form of the global financial crisis which hit in 2007. Greece was so up to its eyeballs in debt at that time that it had no back up to ride the storm and has been struggling financially ever since.
4. Understand and abide by loan terms
As the crisis deepened this year, the Greek government wanted to rip up the loan terms and refuse to abide by them. While some have argued that ‘going it alone’ could be an option for Greece, defaulting on debt is not something an individual can afford to do. Once you start on the slippery slope of failing to repay your debts you will find yourself facing court action, being listed on the debt register, unable to access credit of any kind and potentially facing a visit from the bailiffs. Make paying your debts a priority each month, and if you really can’t afford to, face up to the situation and try to negotiate a payment schedule with your creditors that you can afford.
5. Seek advice
The Greek government called a referendum on 5th July in a move akin to consulting a trusted member of your family on a vital financial issue. The Greek nation overwhelmingly rejected the bailout terms but just over a week later the Greek government accepted a bailout package with worse austerity measures than the one the family had rejected. The powers that be clearly felt they had no choice, but taking advice from someone you trust is always useful to get a different perspective. As the saying goes, two heads are better than one. Even better, take advice from a professional financial adviser who can give a subjective opinion on your situation and find practical solutions to improve it.
6. Sometimes bankruptcy is the best solution
Bankruptcy is the ultimate protection for someone in a dire financial situation where there doesn’t seem to be any other way out. It should only be used in extremis but does allow an individual to start over financially, unencumbered by insurmountable debt.
As mentioned above, there is an argument for saying that Greece was at this point and defaulting on their debt, leaving the euro and issuing a devalued Drachma would have been a better option in the long term for allowing the Greek nation to rebuild.
We will have to wait and see how the future pans out for Greece and its fate is not in our hands but your own financial future is and you should take control of it. Following the above six steps is a good start but for further help with getting your financial affairs in order, a financial adviser may be the way forward.