The Example of Cyprus for a Long Term Loan Strategy
It is always good to look for examples when trying to explain personal economics. In reality, the economics of scale applied to governments are simply an extension of the personal economics of citizens, so the same fundamental principles apply to both. We see a great example of this in Cyprus. How the island nation addressed its economic problems via a long-term loan provide a great example to individual consumers who want to use loans to get out from their financial problems.
To start with, it must be understood that Cyprus found itself in a very serious situation some three years ago. Not as serious as Greece, but the nation still required a â?¬10 billion bailout package in order to avoid economic collapse. The Cypriot government had to lay out a plan for recovery that would satisfy the EU before they could get the long term loan they were looking for. They got that money, and now they are well on their way to a very solid recovery.
Controlling Debt by Controlling Spending
Cyprus, like a lot of individual consumers, found itself in trouble because the government of that country was spending far more than it was taking in. When it was apparent that the Cypriot government would not have enough money to do what it wanted to do, the solution was to tax businesses. That only served to reduce business spending which, in turn, stifled economic growth and resulted in lower revenues for the government. The Cypriot bailout plan called for a complete reversal. The government committed to cutting spending â?? in real terms, not just limiting the amount of growth â?? and shifting the burden of debt to where it rightfully belonged.
Likewise, consumers find themselves in financial straits because they spend more money than they have coming in. A big problem is one of credit card debt. People fail to control their credit card spending only to end up maxing out their cards and making only the minimum payment every month. Then they go out and get new cards in order to continue supporting their spending habits.
A long-term loan to reduce debt for the individual consumer is subject to the same fundamentals that Cyprus used to address national financial problems. For a long term loan to be successful, the consumer must:
- Address spending â?? the consumer cannot continue spending at the same levels that led to the indebtedness
- Address the debt â?? money from the long term loan must go to retire the existing debt that is not affordable
- Develop a responsible budget â?? a responsible budget must accompany settlement of the debt.
In short, a long-term loan to erase a high volume of debt only solves the problem when the consumer takes other steps to address what caused his or her indebtedness to begin with. When that happens, the consumer can regain lost financial footing and secure a better future.
Obtaining a Long Term Loan
Cyprus had to submit a sound recovery plan in order to get its loan from the EU. Individual consumers do not have to go to such lengths, but they do have to prove to lenders that they are a safe risk. This will require a stable employment history, sufficient income to cover the loan and, in the case of a secured loan, the collateral necessary to cover the amount.
We can all learn a lesson from Cyprus. They did what was necessary to get their financial house in order. Individual consumers can do the same thing with a long-term loan and a bit of responsibility.
- Telegraph â?? http://www.telegraph.co.uk/business/2016/03/27/island-in-the-sun-outshines-austerity-enforced-by-europe/
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