Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
Hamlet, 1602 AD
VICTORIA — This advice from old Polonius to his son in Act 1 of Shakespeare’s immortal play seemed especially prescient during German Chancellor Angela Merkel’s recent visit to riot torn Athens.
Greece plummeted over "the edge of husbandry" after decades of runaway deficits, business crippling bureaucracy and endemic corruption. Now the only thing keeping that country from descending into third world status is a €240 billion Euro-zone bailout funded predominantly by German taxpayers. Yet, far from being considered a "friend," Merkel’s visit ignited violent riots that included the burning of Swastika adorned German flags.
Blaming others for their self-inflicted woes is a trait Greeks share with citizens of countries sinking under the weight of too much debt. But these same citizens were perfectly happy to benefit from extravagant government programs which drove public debt to astronomical levels, igniting the Eurozone debt crisis and bringing the U.S. to the brink of the so-called "fiscal cliff." Why now do they suddenly revile those who lent their governments the money?
The answer to that question reveals the reason for the Greek riots and for the increasingly volatile unrest among the multitudes of unemployed youth in Spain, Portugal and Italy. It’s summed up in one word: austerity.
For the first time in modern history the sovereign debt of several Western developed nations has fallen below "investment grade," triggering a cycle of escalating bond-yield risk premiums which makes it even more difficult to service their debts. The end point of this self re-enforcing downward spiral occurs when the proverbial debt wall is hit, either because lenders simply stop buying new bonds or the country defaults on servicing its debt.
Arresting the downward spiral requires highly unpopular austerity measures. And when debt-crippled governments are forced to cut public service jobs and social program spending, those long-ignored lenders suddenly become the scapegoat.
It is, however, the people they elected who should be blamed. As I’ve written before, the cruelest thing a government can do is make people dependent on programs which can’t be sustained.
These days the news is replete with reports of global financial problems. It all seems incredibly complex. But is being a borrower or a lender fundamentally more complicated than when Polonius gave his allegorical advice?
Consider the case of a family whose mortgage and car payments consume much of its income. The family has no savings and its bank accounts are in overdraft. Rather than cutting back, they obtain multiple credit cards that are progressively maxed out, incurring very high interest costs. Finally, the family defaults on its loans, destroying their credit rating and triggering loss of their home and car.
But, instead of recognizing that they are the architects of their own demise: they blame the mortgage, car loan and credit card companies, and consider themselves victims of "the system".
Hitting that debt wall is a more attenuated process for countries than for families. Sovereign debt lenders tend to hang on longer because the prospect of losses on large sovereign loans is so daunting. And unlike ailing Eurozone countries, families can’t look to the Eurozone Financial Stability Fund or the International Monetary Fund for rescue. But even those funds aren’t capable of stopping the downward debt spiral of member countries without severe cuts in public spending.
Another question, how has the United States been able to continue to sell high credit rating bonds when it is on track to double the federal debt to over $20 trillion during President Barack Obama’s eight years in the White House? Because the greenback is the world’s only universal reserve currency of international trade and commerce, a situation that may well end as the Chinese Yuan gains reserve currency status.
Meanwhile, as growing numbers of angry unemployed youth take to the streets, the political fights over stimulus spending versus austerity policies continue. But as in the case of the over-extended family, the cut-spending versus continue-borrowing debate is no longer relevant when lenders stop lending. And many of those unemployed youth will wish their parents had been given the wisdom of Polonius.
Gwyn Morgan is a Canadian business leader and director of two global corporations.