The Greek Lesson: Neither a borrower nor a lender be


July 21, 2015

The Greek Lesson: Neither a borrower nor a lender be

by Martin Khor@www.thestar.com.my

Polonius:
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.

Hamlet Act 1, scene 3, 75–77

“NEITHER a borrower nor a lender be.” This famous quote in the play Hamlet makes Shakespeare as relevant as ever.

Of course, it is quite inconceivable how the modern economy could operate without companies getting loans from banks and investors. But it has also become clear that the mountains of debt owed by families, companies and governments threaten not only to derail but also swallow up whole economies.

The bad management of debt, whether by those who borrow or those who lend, can cause societies to be throttled by recession, job losses and social chaos for years on end.

The Greek ProblemEven they can’t save Greece

“In the worst cases, indebted countries can lose their sovereignty and have their policies subjected to the demands and fancies of creditors, who may have no hesitation to dominate and humiliate those they lent to and who could not repay.

Alexis and Angela Angela Merkel will show the way

This surely is a major lesson from the current tragedy of Greece that continues to be played on our TV screens and in daily news reports. After years of austerity policies imposed by its creditors, the situation deteriorated rather than improved. The economy’s output had dropped 25%; the unemployment rate had shot to over 30%; poverty is rampant; and many families can no longer afford health care.

Early this year, the people voted in a party that advocated an anti-austerity programme. Five months of negotiations with its creditors (European countries, the European Central Bank and the International Monetary Fund) did not yield any positive results. Instead, there was increasing acrimony between both sides.

The Greek banks began to run out of cash when the European Central Bank stopped the flow of new cash to them. Since Greece does not have its own currency, it depends on the ECB for the supply of euros. When the banks were thus forced to close, and each person was limited to withdraw only 60 daily from ATM machines, there was high pressure on the radical Greek government to give in.

Though he won a vote of ‘no to the austerity demands’ in a referendum, within a few days Prime Minister Alexis Tsipras had to swallow his pride and negotiate with the other European leaders to get new bailout funds.

His government could have opted for “Grexit”, to leave the Eurozone and go back to issuing its own currency and thus regaining control over its monetary independence and economic policies.But most of the public wanted to stay with the euro, and reverting to its own currency also comes with risks. Thus, the Greek Premier’s main aim was to stay in the eurozone, and the price was to accept the demands of the hard-liners among the other European countries, especially Germany.

In return for 86bil (RM354bil) of new bailout funds, he had to agree to an even tougher policy package than offered by the same creditors a week ago. Much of the new funds will go to repaying existing debt and thus will not be used to revive economic growth. Instead, growth prospects will be undermined by new austerity measures such as a rise in value-added tax and pension cuts.

Proceeds from privatisation of state assets up to 50bil (RM206bil) are to be put in a fund to repay debts and recapitalise banks and will be managed by creditors, who will also supervise the implementation of agreed policies.The Greek Premier and his Finance Minister protested for most of the all-night July 12 summit of European leaders, but eventually caved in on almost all points.

The debtor was utterly humiliated. The hard-line creditor leaders were extremely cruel. This was the conclusion of some of Europe’s main commentators. Reported the Financial Times: “They crucified Tsipras in there,” a senior Eurozone official who attended the summit remarked. “Crucified.”

In an article entitled “The euro family has shown it is capable of real cruelty”, Suzanne Moore in The Guardian said: “The euro family has been exposed as a loan-sharking conglomerate that cares nothing for democracy. “This family is abusive. This ‘bailout’, which will be sold as being a cruel-to-be-kind deal is nothing of the sort. It is simply being cruel to be cruel.”

The Greek leaders had been ready to adopt the new austerity measures, in exchange for debt relief. Instead, they had to accept even more stringent austerity and privatisation policies and did not get debt relief or even debt restructuring due to the objections of Germany and others.

The IMF, one of the creditor institutions, has now shocked the public by releasing the memo it had presented to the European leaders during the weekend of the fateful 12 July summit.

The memo estimated that Greece’s debt would go up to 200% of its economic output in the next two years, well above the 127% at the start of the European crisis.

This implies a worsening of Greece’s financial situation despite the austerity policies it has to endure, and shows the policies are inappropriate.

The IMF argues that only through large-scale debt relief could Greece’s debt be made sustainable. It advocated debt relief measures “that go far beyond what Europe has been willing to consider so far.”

These are the same points that the Greek leaders had been arguing, but unsuccessfully. The European leaders also ignored IMF advice. For years the rich countries have imposed the same austerity measures on indebted developing countries, which depressed their economies and got many of them deeper into debt.

After decades, when it was clear the debts could not be repaid, debt relief was finally given to some 20 highly indebted developing countries, but their people had already suffered and their economies still did not fully recover.

It is now the turn of Greece to learn the lesson that creditors can be and usually are cruel almost beyond belief.The Greek tragedy is still being played out. The drama continues. The people of Greece are very frustrated and angry. Nobody knows what the ending will be.

  • Martin Khor (director@southcen tre.org) is Executive Director of the South Centre. The views expressed here are entirely his own.

18 thoughts on “The Greek Lesson: Neither a borrower nor a lender be

  1. In no time, we will be reading about the Malaysian tragedy ala Greece, no longer about the Mahathir Malay Dilemma since Najib has delivered us not another evil mode by ignoring Polonius’ advice. The longer he stays in power, the deeper we as a nation will sink into an abyss. Your thoughts, Conrad, CLF and gang.–Din Merican

  2. “The Greek banks began to run out of cash when the European Central Bank stopped the flow of new cash to them. Since Greece does not have its own currency, it depends on the ECB for the supply of euros. When the banks were thus forced to close, and each person was limited to withdraw only €60 daily from ATM machines, there was high pressure on the radical Greek government to give in.”—–@Martin Khor@www.thestar.com.my

    This will NOT happen to Malaysia whose debts are mainly domestically sourced in Ringgit denomination and the Bank Negara, as the national central bank, is well under the control of the Malaysian Government for the necessary supply of fiat currency in RM. Malaysia will NEVER be like Greece, despite all the misplaced warnings from the ALARMISTS – I keep on saying this.
    _______________________
    I do not make any distinction between domestic debt (denominated in local currency) and foreign debt ( be in yen, euro and US dollar). The debt must be repaid or refinanced. As a rule, only borrow for development not for consumption and the rate of return must be better than cost of borrowing. Najib is an irresponsible Finance Minister. You talk too soon. –Din Merican.

  3. This was a marvellous article regarding the Greek lesson, one that I really enjoyed. I especially loved the concise way in which it conveyed all the information required. Allow me a brief introduction: I’m a 15 year old with an interest in finance and economics who wants to share my views with the world at shreysfinanceblog.com. If you could read and reblog one of my articles, it would be very much appreciated! Thanks again for writing this brilliant article.
    _______________
    Well done, young man. Here it is

    https://dinmerican.wordpress.com/2015/07/21/more-on-greeces-financial-debacle/

    All the best for your future and stay in touch.–Din Merican

  4. “NEITHER a borrower nor a lender be’ is a famous quote in the play Hamlet which makes Shakespeare as relevant as ever.

    The Government is perceived as a big borrower [which it will not have to pay] and is also a big lender [with most of the moneys lent may never be recovered or recoverable]’

    The greedy leaders are accumulating wealth to be enjoyed by their future descendants whereas the leaders are leaving huge debts which will be the legacy of the ordinary rakyat. Greece is the current example.

    US is also spending beyond its means but then there are many countries with large reserves and revenues who are supporting the US life styles with little hope of ever collecting their savings which has been lent to US. The reason is that US has been allowed to become so big that if it fails the world economy will fail.

    Only solution: Countries should stop expanding and have revenues beyond their needs to have large reserves which they cannot utilize for own benefit.

    Sadly this solution goes against the very nature of capitalistic economy which is essential to satisfy the bottomless greed of the political/corporate/other leaders and some individuals.

  5. Suzanne Moore in The Guardian said: “The euro family has been exposed as a loan-sharking conglomerate that cares nothing for democracy. “This family is abusive. This ‘bailout’, which will be sold as being a cruel-to-be-kind deal is nothing of the sort. It is simply being cruel to be cruel.”

    That’s how ah-longs, whether legal or extralegal, do business. To pay interest upon interest upon interest ad infinitum – without even scratching the Principal, is the epitome of stupidity. Greece might as well, shoot itself in the head or go jump into the Aegean-Ionian Sea. My sarcastic solution is that they start a war with a non-NATO nation nearby. But my geography fails me.

    Greeks are laggards – they procrastinated, heed and hawed and denied – ever since they fell into the black-hole – instead of taking pro-active measures to revamp their tax system, social safety nets, health care, education and most of all pensions.. They played the system to the ground and they insist on empathy and sympathy? What rubbish! Austerity won’t help, cuz their productivity has dropped below their knees.

    Debt Relief is the final straw that’ll break the EZ. So Greece should just leave EZ, go to the One zillion Drachma to 1 Euro exchange rate, and start a barter economy.

    In irredeemable situations like that, an experiment on Distributism might just work – if they bother to get up in the morning and work collectively/cooperatively. Small is Beautiful and the ‘Black Swan Theory’ applies. Controlled randomness.

  6. “Malaysia will NEVER be like Greece…” alie

    I AGREE! (Apologies, i don’t normally shout in full caps..)
    Ah-Longism (loan sharking) takes many forms – and no two instances are the same.
    Do we have enough ‘tutup aurat’ virgins to send to the Camel Riding Sheiks of the Desert? Especially to those who fake owning oil-fields in the Central Asian Republics? Do you know what proportion of the GST are paid by the Pendatang businesses?
    Izzit anywhere equivalent to the proportions in Income and Corporate Tax?
    So let’s look for Bauxite in them FELDA oil palm plantations eh..?

    Btw, modern Greek attitudes are very much identical to those of UMNOb geniuses. Rent-seeking entitlement.

  7. Worse case scenario in Greece:

    1. Voters get angry and throw out Syriza in the next election.
    (After all, the so-called “far left” Syriza came to power
    by declaring that they would actively resist austerity).
    2. They vote for Golden Dawn.
    3. A Neo-Nazi fascist government emerges in Greece.
    4. First to be targeted and persecuted would be the immigrants and gays
    5. Tensions would increase with Turkey and the
    “Former Yugoslav Republic of Macedonia”.

    http://www.theguardian.com/world/2014/apr/16/greece-golden-dawn-hitler

  8. That famous quote is not quite relevant in the modern world, otherwise the world’s banks and finance companies will go out of business. In fact, the optimum capital structure would be a mix of debt and capital. The trick is to borrow for investment, not consumption. If you can get a return higher than your cost of fund, your return will be much higher due to leverage.

    The problem with Greece and Malaysia is that the borrowing is for consumption. The problem with Greece is that it is a developing country pretending to be a developed country and acting like one. Similarly, Malaysia is behaving like a rich country and its spending are on borrowed funds. The Malaysian government has several private jets at the disposal of the PM and his coterie and entourage. On the other hand, the PM and ministers of the little red go overseas on commercial flights when it has the world’s highest per capita reserves, no external borrowing and high per capita income.

    So the quote should be amended thus: It is okay to be a borrower or lender, but make sure that the loan is for productive purpose.

  9. On the other hand, the PM and ministers of the little red dot go overseas on commercial flights when it has the world’s highest per capita reserves, no external borrowing and high per capita income.

  10. Dr Phua, Greece is a very good example of Failed Social Democracy, is it not?
    Where the Socialism did nothing but encouraged insipid, mercenary self interests.
    No use comparing them with the Modern Teutonic-Baltic Wintry Hardiness, Prudence and Protestant Capitalism, who happen to adopt some socialist ideals.

    But yes, Fascism (or rather conservatism and ethnocentricity) comes with enforced austerity – but it also requires ‘industry’ to be dangerous to their neighbors. If the Fascists take-over, it’s also democracy ain’t it?

    Moral of story is – don’t Label yourself. Stereotyping up to a certain degree is acceptable.

  11. What is the endgame here ? If Najib goes will the next Team Malay potentate be any different ? If UMNO goes will the next Federal government be any different ?

    Fiscal responsibility is very difficult -lah when you got race based social programs, a bloated civil service, corruption, rent seeking , cronyism and all those things that most people would agree are detrimental to Malaysia but these same people will vote for political parties unwilling to slay sacred cows.

    Can Malaysia go the way of Greece ? Who knows ? Maybe or maybe we will scrape through like the last time, by performing a Hail Mary that actually worked. And since we redefined external debt to better reflect….oh hell, all this economic voodoo doesn’t really interest me.

    Back in the day, UMNO could use euphemisms like “leakages” to describe the pilfering that went on but since Najib , the only accurate description is looting. Talking to some long time UMNO war lords (ok-lah two retired war lords), even they are shocked…SHOCKED….by the larceny going on.

    Why kill the goose that laid the golden egg ?

    They didn’t understand what hubris meant, and I was on the wrong side of sober to explain. But then again so were they.

    But maybe the economy won’t get us. Perhaps the infighting within UMNO will screw us up royally. How some folks can get their knickers in a twist about Mahathir is beyond me. Let the old scoundrel wage his war and then burn Rome to the ground. Maybe it’s time we let the goose die and play chicken with an unknown fate.

    Better than all these dire warnings about ending up like Greece. If we do end up like Greece , we would be to blame much like how the average Greek is blamed .

    Just think about it, there would be all these blog post about how f***ed up Malaysians are for well, being Malaysians and ending up like the Greeks.

  12. Lupus,
    Hehehe! Besides fighting the Turks as They have done so since the Byzantium empire. Perhaps, they can avenged their humiliating defeat by the Macedonians led by Alexander the Great! Hahahahaha!

  13. Hi CL Familiaris 10:31 pm

    There are different versions of Communism, Capitalism, Christianity, Islam etc are they not?

    Communism — Khmer Rouge’s Maoism versus Titoism in Yugoslavia
    Capitalism — Japanese-type collectivist versus Anglo-American neoliberal capitalism versus Singapore-style state-sponsored and FDI capitalism
    Christianity — Roman Catholicism versus Amish versus Jehovah’s Witness
    Islam — Mainstream Sunni versus Daesh-type clerico-fascism in Syria/Iraq

    Same with Social Democracy. What is wrong with declaring that I am a supporter of the Scandinavian version of Social Democracy and that Malaysia has a lot to learn from this form of Social Democracy? (I am against Tony Blair’s “Third Way” version of social democracy).
    If you do not have a clear political programme and guide to action, how are you going to bring about significant socio-economic change in Malaysia?

    If fascists/ultranationalists take over in Greece (even via democratic elections), it is going to be bad for SE Europe, the EU and Europe. I would predict that Greek fascists are going to engage in confrontation with Turkey (over Cyprus for instance) and with Macedonia (over the name of this ex-Yugoslav republic). A Greek fascist govt will also inspire fascists in other countries such as Hungary (Jobbik), France (National Front), Italy (Northern League). And Jews, Roma, Muslims, immigrants better watch out!

  14. Here are some slides I created:

    phuakl.tripod.com/socdem1.ppt
    Introduction to Social Democracy

    phuakl.tripod.com/socdem2.ppt
    Social Democracy and the Economy

  15. Phua,
    You are right! Singapore is a country where socialism does work. One good example is the price control through the setting up of NTUC fairprice. One of the prominent NTUC leader is none other than DEVAN NAIR. Hence to Conrad, screw you when you talk about DAP not adhering to secularism and………hehehehe

    Lupus,
    White privilege = ketuanan melayu……..According to you, Whites = individualism that Descartes cherished……What BS!

    Yes, my strong geographical knowledge tells that Greece can invade a Non NATO country called Macedonia though Serbia may be itching in invading Macedonia in response………because macedonians to serbs are slavic instead greekish………hahahaha
    Heck, why stop there? Lets make it bigger

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