The European banks are still in deep trouble. They are being protected only by the ability of the politicians of the PIIGS to persuade the public that they will be able to maintain interest payments in the near term. Investors care nothing about long-term prospects. They assume that they can sell bad bonds to the next group of nave investors. Each group assumes that those who follow will be suckers. They regard themselves as sophisticated investors who know what will happen and who will be able to unload the bonds on really stupid investors.
This is known historically as greater-fool investing. It always prevails in the final stages of a bubble.
Last May, I wrote of the crisis in Greek government financing that we should not expect much from the Prime Minister’s assurances that there would be tight austerity measures imposed on the nation, especially its government sector. In an article titled, “PIIGS Win. Bankers Win. Voters Lose,” I wrote:
As for cutbacks in Greek spending, ho, ho, ho. As for austerity in Southern Europe, ha, ha, ha. Once you owe the banks up north a trillion dollars, you will get the politicians up north to sell more debt, so that you can meet your interest payments to their banks, and then sell more debt at low rates.
Debt will rise. That is the inescapable reality of moral hazard. Bank profits will go on, because bank losses are transferred to sovereign governments. Nothing has changed. The same old system rolls on.
On September 10, Greek trade unions began organizing another wave of riots in preparation for a speech by the Prime Minister. On September 11, the riots began — a Saturday. One British source recorded that at least 20,000 demonstrators marched to the conference center where the PM was giving his speech. The police used tear gas against the crowd.
The Prime Minister announced a reduction in the tax rate for businesses from 24% to 20%. He also promised to privatize the electricity company.
The country must reduce its deficit from almost 14% of GDP in 2009 to 8% this year. This, to put it bluntly, is impossible. Everyone knows it’s impossible. Nevertheless, he announced: “I have every confidence that, by the end of the year . . . we will have achieved the 40% reduction of deficit.”
“The [shortfall] in revenues is about 1.5 billion euros,” he said. “But with the pace at which we are advancing and with the measures we have already taken, we are confident we will reach the goal we have set for 2010.”
Budget figures released on Friday suggest that, despite various measures taken by authorities, tax revenues increased by only 3.3% in the eight months to August, well behind the 13.7% target for this year. On the positive side, however, public spending for that period fell by 12%, more than double the 5.8% target for end-2010.
He also assured his listeners that there is no need for further austerity measures. He also assured them that the measures already taken will produce a positive response from Western lenders.
Not if they have read Michael Lewis’s article in Vanity Fair (Oct. 1), “Beware of Greeks Bearing Bonds.”
Lewis became famous for his book on Wall Street, Liar’s Poker. His book, The Blind Side, told the story of a Memphis youth who was taken in by a Christian family, and from there made it into the National Football League. The movie pulled in a quarter of a billion dollars in American theaters, and won Sandra Bullock an Oscar.
Now he goes after Greek government finances. It is a story like nothing I have ever read about chicanery.
The are 11 million people in Greece. The nation has run up an operational deficit of $400 billion, plus a government pension fund obligation of $800 billion. That’s $1.2 trillion. This, for a nation with a population smaller than Los Angeles. This is a debt of $250,000 for every Greek.
“Our people went in and couldn’t believe what they found,” a senior I.M.F. official told me, not long after he’d returned from the I.M.F.’s first Greek mission. “The way they were keeping track of their finances — they knew how much they had agreed to spend, but no one was keeping track of what he had actually spent. It wasn’t even what you would call an emerging economy. It was a Third World country.”
This is a nation that entered the European Currency Union as an equal a decade ago. This means that banks around the world have bought the bonds of a nation that cannot possibly repay the loans.
This week, an IMF commission is in Greece to look over the books. There seems to be no concern in international markets.
His summary of the degree of mismanagement and universal corruption leaves the reader stunned.
The national railroad system generates revenues of 100 million euros. Its wage bill is 400 million, plus 300 million in other expenses. The average railway employee earns 65,000 euros a year.
The public school system is among the worst in Europe, but it employs four times as many teachers per student as Finland, the nation with the best system.
Then there is retirement. For arduous occupations, the retirement age is 55 for men; it is 50 for women. “As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.”
Then there is the tax collection system. Almost no self-employed worker pays income taxes. Physicians accept cash only. Two-thirds of them report only 12,000 euros per year, on which no taxes are owed. One whistle-blower told Lewis that if the law were enforced, every physician in Greece would go to jail.
The easiest way to launder cash was to buy real estate. Conveniently for the black market — and alone among European countries — Greece has no working national land registry. “You have to know where the guy bought the land — the address — to trace it back to him,” says the collector. “And even then it’s all handwritten and hard to decipher.” But, I say, if some plastic surgeon takes a million in cash, buys a plot on a Greek island, and builds himself a villa, there would be other records — say, building permits. “The people who give the building permits don’t inform the Treasury,” says the tax collector.
And so it goes, in every field. Only salaried people pay the income tax.
As for bribery, it is universal. If someone gets caught cheating, he pays a small fine. One of the two whistle-blowers who spoke with him turned in a company that had earned 15 million euros. It paid no taxes. The whistle-blower was demoted. The firm paid a fine of 2,000 euros.
The man had evidence of so many similar cases that Lewis stopped him. It would take all night to view them.
In Athens, I several times had a feeling new to me as a journalist: a complete lack of interest in what was obviously shocking material. I’d sit down with someone who knew the inner workings of the Greek government: a big-time banker, a tax collector, a deputy finance minister, a former M.P. I’d take out my notepad and start writing down the stories that spilled out of them. Scandal after scandal poured forth. Twenty minutes into it I’d lose interest. There were simply too many: they could fill libraries, never mind a magazine article.
This is the nation that persuaded the world’s most sophisticated investors to lend it hundreds of billions of dollars worth of Greek government bonds at Germany’s interest rates. Nobody bothered to check the books. There were no books to check.
The man in charge of totaling up the bill last fall, when the new government came into power, could not get the accounts for a week. Every day, there were new revelations. One government pension fund was running a deficit of a $1 billion a year. There was no record of it. It was off-budget. In one week, the annual deficit went from 7 billion euros to 30 billion. No one had ever counted it before.
Lewis’s summary is persuasive.
The structure of the Greek economy is collectivist, but the country, in spirit, is the opposite of a collective. Its real structure is every man for himself. Into this system investors had poured hundreds of billions of dollars. And the credit boom had pushed the country over the edge, into total moral collapse.
Will the Greek government default? He doesn’t answer directly, but indirectly, it is clear that he thinks it will. He sees this as a moral collapse. He does not try to argue that it is possible for the government to avoid default. The more interesting question, he says, is whether the Greeks can reform themselves. He ends his article with this.
It behaves as a collection of atomized particles, each of which has grown accustomed to pursuing its own interest at the expense of the common good. There’s no question that the government is resolved to at least try to re-create Greek civic life. The only question is: Can such a thing, once lost, ever be re-created?
The moral collapse is only marginally related to the willingness of voters to look out for their own interests. The moral collapse came when voters trusted governments to tell them the truth. Voters trusted government promises to fund the majority in old age at the expense of the rich. This is a widespread moral collapse.
Default will follow. “The wicked borroweth and payeth not again” (Psalm 37:21).
DEEPER, NOT DIFFERENT
Lewis’s article shows in scary terms the extent of the chicanery and corruption of Greek civil life. But it is clear that all modern governments are heading for the Great Default. All of them play games with their versions of Social Security and Medicare. The accounting systems of all modern nations are exercises in deception of the public. Everyone inside the top echelon of governments know this. This has been written about in the intelligentsia’s media for years.
There is no political will to resist the voters, who want something for nothing. There is no willingness of voters to listen to the truth. The politician in any nation who trots out the figures and says, “There will be a default,” loses at the next election.
The problem is universal. The deferral of dealing with it is well-developed. We are told in the United States that the system can be saved with just a few minor adjustments. Congress never makes these minor adjustments. Why not? Because they are not minor. They are politically suicidal.
Just now the global financial system is consumed with the question of whether the Greeks will default on their debts. At times it seems as if it is the only question that matters, for if Greece walks away from $400 billion in debt, then the European banks that lent the money will go down, and other countries now flirting with bankruptcy (Spain, Portugal) might easily follow. But this question of whether Greece will repay its debts is really a question of whether Greece will change its culture, and that will happen only if Greeks want to change.
The error of the article is to single out the Greeks as if they were fundamentally different from the voters in the rest of the industrial West. They aren’t. They are just farther down what Lewis correctly calls the road to perdition.
The European banks are creditors to a government that completely bamboozled them. The bankers look like fools, which they surely are. They are also creditors to governments of only marginally more solvent countries. They are trapped.
The reality is this: the European Central Bank and the International Monetary Fund intervened in May to put up more credit because they believed that a Greek default would undermine the credibility of the banking system.
None of this matters in the opinion of Western lenders. They have extended so much credit to governments that will default that they do not bother to attempt to escape. There is no escape hatch. There are no buyers. So, they pretend, as Greece pretended for a decade, that the debt system is not smoke and mirrors. Anyone who blows the whistle threatens the entire system. Such a person will find his career ended.
No one wants to believe any of this, any more than Greek voters want to believe it. If it really is true, then a Great Default is coming. The banks will be left holding IOUs from bankrupt governments. So, central banks will inflate to save the largest banks.
But at some point, reality will intrude. The central bankers will have to decide: do they want monetary stabilization, interest rates doubling or tripling, government defaults, and worldwide depression? Or do they want hyperinflation? If they can save the largest banks, they will stabilize. Hyperinflation destroys the economic system.
Governments can nationalize central banks, turning their nations into Zimbabwe. This has not happened to any peacetime Western nation since the aftermath of World War II, and only in the defeated nations.
Ludwig von Mises called hyperinflation the crack-up boom. It is a destructive force. But the alternative is an open default. Politicians fear this. If they nationalize the central banks and force them to buy government bonds, we will bet the crack-up boom.
Greece is the tip of the iceberg — a Mediterranean iceberg. There is no way that the government will not default. But investors want to believe obvious lies today and face reality tomorrow. They are just like voters and politicians.