Image a friend who only works three days a week, but spends like he’s the CEO of a Fortune 500. He’s maxed out three credit cards and drained a line of credit, but now that the money is up he hopes his rich uncle will bail him out.
If you’re the European Union, that nephew is Greece.
Greece is facing a financial crisis and won’t be able to make a payment on its debt next month if EU finance ministers don’t bail it out to the tune of US$17 billion.
At the heart of the crisis is Greece’s habit of breaking the basic rules of finance that keep countries, companies and individuals in the black.
“You consistently spend more than you earn and you borrow to make up the difference,” said Warren MacKenzie of Weigh House, a financial consulting firm.
At the end of that road is bankruptcy, and it looks like that is where Greece is headed, he said.
It’s a reality faced by 93,000 Canadians in 2010, according to federal government statistics, and could soon be the consequence for Greece.
MacKenzie says Greece isn’t collecting enough taxes to pay for the wide array of free services it offers its citizens.
Now, the country is relying on the European Union to step in.
“Greece’s rich uncle was the EU and Germany,” said MacKenzie. “At some point, your rich uncle will say this isn’t doing any good, to bail you out and not face reality. I’m tired of doing it.”
Indeed, the European Union has put its foot down, requiring Greece to implement austerity plans including tax hikes, spending cuts and privatization. The measures have been met with protests and riots from Greeks.
Greece’s financial partners also have lessons to learn, says Greg Pollock, the president and CEO of Advocis, the financial advisors association of Canada.
“Whether you are living together, married, or engaged you need to be aware of the spending habits, the debt habits and the credit habits of your partner,” he said. “In the same way France and Germany should have known what Greece was doing.
MacKenzie said EU countries should also be careful going forward because reorganizing or consolidating debt isn’t enough to solve the problem.
“People do that,” he said. “They get consolidation loans and pay off their credit cards, but unless they change their behaviour, then they go out and lose their credit cards again.”
Greece needs to change its behaviour to pull out of this crisis, say both financial advisors.
“You have to look at needs and at wants,” said Pollock. “Making some hard choices is a very important first step.”
MacKenzie said it’s time for Greece to come to grips with reality.
“Let’s clean-up this mess,” he said. “It’s going to be painful and there’s going to be dislocation and disruption and in the case of Greece riots in the streets, but all of this is going to happen anyway and why not address it now before it gets worse.”
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