From the outside looking in, commercial finance seems quite a complex business, and when it comes to highly structured transactions and loans, it is. However, the fundamentals of lending of any kind are basically simple, and not much more than everyday common sense.
In that regard, any lender’s primary concern regarding any type of loan or advance is the borrower’s ability to pay them back as agreed and on time. Consequently, the first step in any type of financial transaction is for the lender to determine the borrower’s current and projected financial condition.
To that extent, most experienced lender’s will use the borrower’s financial history as a gauge for determining how that entity has managed similar types of obligations in the past. And additionally, reference sources such as credit rating agencies, other creditors and perhaps even trade relations will be consulted regarding the borrower’s past payment performance.
In addition, another determinant of likely future behavior or potential occurrences can be gleaned from comparison to other cases having similar characteristics or approximate circumstances. And that’s the factor that set me to typing today because there’s now this situation in Cyprus where the nation’s gone broke, can’t meet its obligations and as a result, attaching the bank accounts of its citizens to help borrow money from the EU to bail the country out.
According to BBC News Europe, “A 10bn-euro bailout from the EU and IMF - required to keep the debt-laden Cypriot economy afloat - will only be granted if Cyprus itself raises 5.8bn euros, most of which looks likely to come from depositors with more than 100,000 euros in Bank of Cyprus and Laiki (Popular Bank).”
So, using today’s examples of lending basics: What does the Cyprus financial debacle tell us?
Simply stated, I believe what we’re seeing in Cyprus is precisely the same thing that’s happening here. The only difference is the size of our nations. However, in both cases, there are folks in leadership who either completely ignored the potential consequences of unbridled debt for personal/political purposes or are too ignorant to understand the perils of the financial situation. But, either way, the citizenry loses because of them.
Therefore, as I previously suggested, a degree in finance isn’t needed, nor is any kind of magical crystal ball to project our financial future, which is worse than dismal. And if things keep going as they are, it might be wise to start hording fungible assets somewhere hidden and safe right now.
That's it for today folks.
Adios
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