Neither a Borrower Nor A Lender Be

July 13, 2015

It is a sign of my advancing age that I can remember when the admonition “neither a borrower nor a lender be” was still in vogue.  During my lifetime the role of credit has been critical to the growth of the world’s economies, for better or for worse.  It is now sometimes hard to understand why anyone should be so against debt – but if you ever needed a lesson on why previous generations were so wary of money lending look no further than Greece.

During the late 1970s there was a debate about whether a small, primarily rural, economy like Greece should wait before joining the European Union.  Many concerns were expressed in this debate, not least of which was the fact that the Greek economy was in need of a broad range of structural reforms.  Of course, these concerns were ignored as political forces allowed Greece into the EU in 1981.  For the first fifteen years or so the Greeks actually did worse than they might have done outside of the EU as their relatively weak domestic industries were opened to real competition.

Then, in 2001 Greece was allowed to join the Eurozone.  Buoyed by access to lots of borrowing, and the success of its shipping, tourism and financial services, the Greek economy actually outperformed the rest of the EU for a while.  When things were still going well, and especially during the period leading up to 2008, there was no incentive to reform the economy in areas such as pensions, labor regulations, or monopolistic practices.  Greek workers were encouraged to retire at 55 since they had “worked so hard”.  Competition for professional services was not condoned since that would be considered, well, “unprofessional”.

All this Greek thinking came to a screeching halt though when the recession and Eurozone crisis hit.  By that time the Greek economy had incurred too much debt to service.  Despite repeated efforts to help, the politicians only succeeded in putting off the inevitable day of reckoning – and in the process made that day all the more unpleasant.  And as Greece accumulated its pile of borrowing, the Greek people began to believe that they deserved to keep a lifestyle way beyond their collective means.

So now the whole world is rocked and shocked to see an apparently developed country brought to its knees by debt, while the people of that nation are outraged to discover their lenders want their money back.  The practice of borrowing has stealthily migrated towards the practice of blackmail – and all parties involved feel very hard done by.

So what lessons are there for us spectators in the gallery?  Most of them are really rather obvious.  First of all, be wary of a politician’s offer of help.  For lenders, make sure your creditor can repay – but if things are not working out act soon, and act decisively.  And for borrowers, always remember that a debt incurred is a debt to be repaid.  Better still keep your borrowings as low as possible, and maintain a reserve for unforeseen events.  The Greeks will be forever linked with the word “tragedy,” and the consequences of ignoring basic rules for handling debt are often tragic.

Richard Rushton