Investing Caffeine

From Bearded Monks to Greek Decline

Photo source: vatopaidi.wordpress.com

Noted author Michael Lewis has sold millions of books and written on topics ranging from professional baseball to Wall Street and Iceland to Silicon Valley. Now, he has decided to tackle the gripping but nebulous Greek financial crisis through the eyes and bearded mouths of Greek monks in a recently released article from Vanity Fair.

At the heart of the story is a Christian monastery (Vatopaidi), located on a northeastern peninsula of Greece. This ten-century old sanctuary has helped expose the tenuous state of the Greek economy, which is estimated to be sitting on $1.2 trillion in debt (representing $.25 million per working Greek adult) – a massive number considering the relatively petite size of the country. Beyond interviewing the Vatopaidi monks, Lewis trolled through the country interviewing various politicians, businessmen, government officials, and natives in order to make sense of this Mediterranean mess.

The Scandal Genesis

Starting in 2008, news filtered out that Vatopaidi had somehow acquired a practically worthless lake and swapped it for 73 different government properties, including a 2004 Olympics center. The Vatopaidi monastery effectively created an estimated $1 billion+ commercial real estate portfolio from nothing, thanks to one of the key Vatopaidi monks negotiating a fishy, behind-the-door government exchange scheme. This scandal, among other issues, ultimately lead to the collapse of the prior Greek ruling party and sent Prime Minister Kostas Karamanlis packing his bags.

The Greek crisis did not happen overnight, but rather decades. A casual observer may mistake the caustic Greek media headlines as proof to blame Greece as the reason behind the global financial meltdown,  Rather, the challenges faced by this island-based country are more symptomatic of the weak global credit standards and the undisciplined disregard for excessive debt levels. Even with an embarrassingly high debt/GDP ratio (Gross Domestic Product) of about 130%, Greece’s desperate financial situation is a relatively minor blemish in the whole global scheme of things. More specifically, the $300 billion or so in Greek GDP represents the equivalent of a pubescent pimple on the face of a $60 plus trillion global economy.

The Greek Concern

The Vatopaidi scandal is still being investigated, but how did this broader debt-induced, Greek fiscal catastrophe occur?

Lax tax collection, absence of legal enforcement, and simple corruption are a few of the contributing reasons. Lewis describes the situation as follows:

“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.”

A tax collector and real estate agent from the article had this to say:

“If the law was enforced, every doctor in Greece would be in jail.”  AND
 “Every single member of the Greek Parliament is lying to evade taxes.”

The Greek government also did an incredible job of distorting the reported economic data and swept reality under the rug:

“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. (International Monetary Fund) representative asked.

The Greek debacle was not an isolated incident. The significant dislocations occurring around the earth’s small and dark corners have directly impacted our lives here in the U.S. Take for example Iceland, the country that New York Times columnist Thomas Friedman called a converted “hedge fund with glaciers.” Not only did this historically tiny fishing island do dynamic damage to its southern neighbors in Europe, but damage from its collapsing banks extended all the way to busted condominium developments in Beverly Hills, California.  Or consider Dubai and the multi-billion dollar debt restructuring at Nakheel Development that held the world breathless as people around the world watched in trepidation.

These examples, coupled with the Greek financial crisis highlight how widespread the collateral damage of cheap credit proliferated. The cost of money is still dangerously low, as governments around the globe attempt to stimulate demand, however the regulators and banking industry must remain vigilant in maintaining loan and capital deployment discipline. The hot debates over financial regulatory reform in the U.S., along with the recent Basel III banking requirement discussions are evidence of the need to restore balance and stability to the global financial playing field.

The global financial crisis has spooked billions of people around the world. Like a mysterious boogeyman, the crisis has turned cheap and easy credit into the public’s worst nightmare. The mysticism and general opacity surrounding the inner-workings of Wall Street and global financial markets attacks at investors’ inherent emotional vulnerabilities. Michael Lewis has once again helped turn what on the exterior seems extremely complex and confusing and boiled the essence of the problem down into terms the masses can digest and put into perspective.

Bearded monks loading up on government-swapped commercial real estate may have provided valuable lessons and insights into the global financial crisis, however now I can hardly wait for Michael Lewis’s next topic…perhaps balding nuns in South African gold mines?

Read the whole Vanity Fair article written by Michael Lewis

Wade W. Slome, CFA, CFP®  

September 13, 2010 at 12:57 am 1 comment