Tag: Greece

Boomerang – Michael Lewis Looks at the New Third World

Michael Lewis packages his stories on the effects of the global financial crisis in Iceland, Greece, Ireland, Germany, and California into one book: Boomerang. If you had ready the stories when they were published in Vanity Fair, then you’ve ready the book. If you missed some (or all) of those stories then this book is great viewpoint on how five countries got themselves into trouble with excessive debt.

I had already read the first four articles when they appeared in Vanity Fair, but I had not yet gotten to the article on California. In fairness, Boomerang was a given to me as a gift so I did not come out of pocket to put it on my bookshelf. I enjoyed revisiting the four stories and the new California story.

They each seemed to work better in the collection than standing on their own. Since each story is relatively short, they lack the depth and understanding I’m used to getting in one of Michael Lewis’ books. Collectively, there is bit more depth as you can see how the five different countries got into trouble in different ways by becoming over-leveraged.

It’s a Michael Lewis book, so that means it’s easy to read and smart. He has a gift for taking complicated subjects and using individuals to highlight how his theories work in the real world.

My gripe is not with the book, but with Vanity Fair who sponsored Lewis in writing the five stories, each of which has appeared in the magazine. I purchased a subscription to Vanity Fair just because of these Lewis articles. I thought I was choosing to upgrade the freemium model.  I was willing to pay more for the superior experience of reading the article in the magazine instead of online. However, the publisher would put them on the website (for free) before the magazine ended up in my mailbox. One premium of getting access to the content first, was actually the opposite. I was getting the content later than if I had chosen not to pay for it. It’s not like the magazine is ad-free.

So why I would I renew my subscription?

Michael Lewis, Greece, and Corruption

Michael Lewis has moved from Wall Street, to baseball, the left tackle, Iceland, the credit collapse and on to Greece. He takes a look at Greece’s financial crisis in the October issue of Vanity Fair: Beware of Greeks Bearing Bonds.

One issue is the debt hangover. Greece has about $400 billion in outstanding government debt and $800 billion in pension obligations. That $1.2 trillion is about a quarter-million for each working adult.

Another is the generous wages paid to government works. The average government worker makes three times the wage of the average private-sector job. The national railroad has annual revenues of €100 million, but has an annual wage bill of €400 million and another €300 million in other expenses.

Then there is the corruption. “It’s simply assumed, for instance, that anyone who is working for the government is meant to be bribed.”

The government is notorious for pulling tax collectors off the streets during election years. An estimated 2/3 of Greek doctors report incomes of less than €12,000. Self-employment means self reporting of income. Only those salaried employees who have taxes taken from their paycheck get stuck paying taxes. Greece is a poor country full of rich people.

Just to prove the point, he didn’t get a receipt for his coffee with a whistle-blowing tax collector. Even the fancy hotel was not paying the sales tax it owed.

“Everyone is pretty sure everyone is cheating on his taxes, or bribing politicians, or taking bribes, or lying about the value of his real estate. And this total absence of faith in one another is self-reinforcing. The epidemic of lying and cheating and stealing makes any sort of civic life impossible; the collapse of civic life only encourages more lying, cheating, and stealing. “

Greece was desperate to become part of the European Union. That meant they needed to get their deficit under control and prove a stable economy. It seems like they did it by “cooking their books” instead of economic policy. They simply moved expenses and obligations off their balance sheet to earn their 2001 entrance to the EU, swapping the drachma for the euro.

What went wrong?

Prime Minister Costas Karamanlis was involved in a scandal, leading to his ouster and the ouster of his government. The new finance minister took the more honest approach and began finding all of the financial skeletons.

[He] found so much less money in the government’s coffers than it had expected that it decided there was no choice but to come clean. The prime minister announced that Greece’s budget deficits had been badly understated—and that it was going to take some time to nail down the numbers. Pension funds and global bond funds and other sorts who buy Greek bonds, having seen several big American and British banks go belly-up, and knowing the fragile state of a lot of European banks, panicked. The new, higher interest rates Greece was forced to pay left the country—which needed to borrow vast sums to fund its operations—more or less bankrupt. In came the I.M.F. to examine the Greek books more closely; out went whatever tiny shred of credibility the Greeks had left. “How in the hell is it possible for a member of the euro area to say the deficit was 3 percent of G.D.P. when it was really 15 percent?” a senior I.M.F. official asks. “How could you possibly do something like that?”

The other focus of the Lewis’ story is the Vatopedi Monastery that was part of the Karamanlis scandal. The monastery had title to a lake in northern Greece. They convinced the Greek government to trade for the ownership of the lake with government owned property. This included the gymnastics center from the 2004 Olympics. The lake was worth roughly €55 million and the government property they received is probably worth many time that amount. It’s even more valuable now that the monastery has convinced the government to re-zone big chunks of the property for commercial purposes.

It seems the monks just want to use the money to rebuild their monastery. Nobody is claiming the leadership of the monastery is pocketing the money.  The same is not true on the other side of the transaction.

Sources:

Image of the Parthenon is by Simon Tong.