(2010-09-18) Lewis Greek Debt

Michael Lewis on the ridiculousness of the Greek economy and Sovereign Debt.

In just the past decade the wage bill of the Greek public sector has doubled, in real terms—and that number doesn’t take into account the bribes collected by public officials.

Oddly enough, the financiers in Greece remain more or less beyond reproach. They never ceased to be anything but sleepy old commercial bankers. Virtually alone among Europe’s bankers, they did not buy U.S. subprime-backed bonds, or leverage themselves to the hilt, or pay themselves huge sums of money. The biggest problem the banks had was that they had lent roughly 30 billion euros to the Greek government—where it was stolen or squandered. In Greece the banks didn’t sink the country. The country sank the banks.

When Papaconstantinou arrived here, last October, the Greek government had estimated its 2009 Budget Deficit at 3.7 percent. Two weeks later that number was revised upward to 12.5 percent and actually turned out to be nearly 14 percent... “We had no Congressional Budget Office (CBO),” explains the finance minister. “There was no independent statistical service.” The party in power simply gins up whatever numbers it likes, for its own purposes.

The costs of running the Greek government are only half the failed equation: there’s also the matter of government revenues... The only Greeks who paid their Income Tax-es were the ones who could not avoid doing so—the salaried employees of corporations, who had their taxes withheld from their paychecks... An estimated two-thirds of Greek doctors reported incomes under 12,000 euros a year—which meant, because incomes below that amount weren’t taxable, that even plastic surgeons making millions a year paid no tax at all... The easiest way to cheat on one’s taxes was to insist on being paid in cash, and fail to provide a receipt for services. 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.

The Greek state was not just corrupt but also corrupting. (Culture, Rule Of Law)

For most of the 1980s and 1990s, Greek interest rates had run a full 10 percent higher than German ones.. Greece wanted to be treated, by the financial markets, like a properly functioning Northern European country. In the late 1990s they saw their chance: get rid of their own currency and adopt the euro (EU). To do this they needed to meet certain national targets, to prove that they were capable of good European citizenship—that they would not, in the end, run up debts that other countries in the euro area would be forced to repay. In particular they needed to show budget deficits under 3 percent of their gross domestic product, and inflation running at roughly German levels. In 2000, after a flurry of statistical manipulation, Greece hit the targets. To lower the budget deficit the Greek government moved all sorts of expenses (pensions, defense expenditures) off the books. To lower Greek inflation the government did things like freeze prices for electricity and water and other government-supplied goods, and cut taxes on gas, alcohol, and tobacco. Greek-government statisticians did things like remove (high-priced) tomatoes from the consumer price index on the day inflation was measured. “We went to see the guy who created all these numbers,” a former Wall Street analyst of European economies told me. “We could not stop laughing. He explained how he took out the lemons and put in the oranges. There was a lot of massaging of the index.” Which is to say that even at the time, some observers noted that Greek numbers never seemed to add up... To remain in the euro zone, they were meant, in theory, to maintain budget deficits below 3 percent of G.D.P.; in practice, all they had to do was cook the books to show that they were hitting the targets. Here, in 2001, entered Goldman Sachs, which engaged in a series of apparently legal but nonetheless repellent deals designed to hide the Greek government’s true level of indebtedness.

The day before I left Greece the Greek Parliament debated and voted on a bill to raise the retirement age, reduce government pensions, and otherwise reduce the spoils of public-sector life... Thousands upon thousands of government employees take to the streets to protest the bill... Two months earlier, on May 5, during the first of these protest marches, the mob offered a glimpse of what it was capable of. Seeing people working at a branch of the Marfin Bank, young men hurled Molotov cocktails inside and tossed gasoline on top of the flames, barring the exit. Most of the Marfin Bank’s employees escaped from the roof, but the fire killed three workers. The events took place in full view of the Greek police, and yet the police made no arrests.

The question everyone wants an answer to is: Will Greece default? There’s a school of thought that says they have no choice: the very measures the government imposes to cut costs and raise revenues will cause what is left of the productive economy to flee the country... On the face of it, defaulting on their debts and walking away would seem a mad act: all Greek banks would instantly go bankrupt, the country would have no ability to pay for the many necessities it imports (oil, for instance), and the country would be punished for many years in the form of much higher interest rates, if and when it was allowed to borrow again... There’s no question that the government is resolved to at least try to re-create Greek civic life (Civil Society). The only question is: Can such a thing, once lost, ever be re-created?

The whole monk story seems irrelevant to the macro story, except to the extent that the monk's got rich because of the inherent Corruption in Greek society. But it's not like the dollars involved with the monks are anything more than rounding error in the macro situation.

The EU shouldn't have let Greece in from the beginning. They should now just kick them out on the basis of lying in their finances, and let the Greeks sort it out. They will Collapse, but there's no solution for that, they're going to have rebuild their society without the game of useless public employees. (Just think of adding all the military staff/contractors to US current UnEmployment once we get out of these stupid wars...) And the EU should sue Goldman Sachs.