Greece exits its bailout

On 20 August 2018, Greece formally left its third bailout programme, after eight years of adjustment. It was the close of a long, hard chapter for the country and for the euro area, which had tested the strength of the common currency and the patience of millions of citizens, inside and outside Greece’s borders. Eight years is a long period, during which the expectations of families, companies and institutions were transformed.

From the perspective of a business owner or a family in another country, the news may seem a distant matter. Yet it contains practical lessons about the risks of excessive debt, the value of liquidity and what it costs, in economic and social terms, to reach a situation in which others set the conditions. It is worth reading with respect for what was lived through and attention to what it teaches. And without ignoring that each country has its own history and circumstances, which prevent its lessons from being transferred mechanically.

A long road

For eight years, Greece received financial assistance in exchange for applying adjustments: spending cuts, tax rises and reforms. With the formal exit from the third programme that oversight ended on paper, although its effects would go on being felt for some time.

Bailout programmes work like a conditional loan: the country receives funds it could not obtain on the markets on reasonable terms, and in exchange commits to correct its imbalances. Those adjustments usually carry a high social cost, because they affect jobs, wages, pensions and public services. It is a reminder that a debt crisis is not only a matter of figures, but also of everyday lives. Behind the deficit and debt figures there are jobs, savings and projects that are completely reorganised.

What changes when the programme ends

Leaving a bailout means going back to borrowing without the direct supervision of the official creditors, but it does not remove outstanding obligations or erase the effects of the adjustment. It is a turning point, not a complete solution.

The debt still exists and will have to be serviced for years. What changes is the way of doing so: the country again depends on its own credibility with investors, and on its ability to meet its commitments without outside tutelage. That kind of credibility is built slowly and can be lost quickly. For the markets, the test begins now, because showing that stability can be maintained without direct supervision is what consolidates confidence in the long run. That is why the figures of the coming years will be more revealing than the headline of the day of the exit.

The lesson for business owners

The Greek experience showed how costly it is to reach a situation of lack of liquidity. For a company or a family, keeping reserves, not depending on a single source of financing and staggering debt maturities are habits that help face difficult periods without having to accept forced terms.

On a household or business scale, the analogy is useful. Someone who has borrowed money and has no room to repay it usually negotiates from a weak position, accepting high interest, demanding guarantees or awkward terms. By contrast, someone who talks to the bank while all is well has more alternatives. It is therefore worth reviewing the structure of borrowing in advance and keeping an open relationship with creditors. Showing clearly how one plans to repay what was lent is usually the best guarantee that terms will be maintained.

The best negotiation with a creditor is the one held before it is needed.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.