Boomerang: Travels in the New Third World (10 page)

The knowledge that I am meant to be back in the church at six in the morning makes it more, not less, difficult to sleep, and I’m out of bed by five. Perfect silence: it’s so rare to hear nothing that it takes a moment to identify the absence. Cupolas, chimneys, towers, and Greek crosses punctuate the gray sky. Also a pair of idle giant cranes: the freezing of the monks’ assets has halted restoration of the monastery. At 5:15 come the first rumblings from inside the church; it sounds as if someone is moving around the icon screens, the sweaty backstage preparations before the show. At 5:30 a monk grabs a rope and clangs a church bell. Silence again and then, moments later, from the monk’s long dormitory, the
beep beep beep
of electric alarm clocks. Twenty minutes later monks, alone or in pairs, stumble out of their dorm rooms and roll down the cobblestones to their church. It’s like watching a factory springing to life in a one-industry town. The only thing missing are the lunch pails.

Three hours later, in the car on the way back to Athens, my cell phone rings. It’s Father Matthew. He wants to ask me a favor.
Oh no
, I think,
they’ve figured out what I’m up to and he’s calling to place all sorts of restrictions on what I write
. They had, sort of, but he didn’t. The minister of finance insisted on checking his quotes, but the monks just let me run with whatever I had, which is sort of amazing, given the scope of the lawsuits they face. “We have been reading this adviser in the American stock market,” says the monk. “His name is Robert Chapman . . . ” (I’d never heard of him. He turned out to be the writer of a newsletter about global finance.) His fellow monks, said Father Matthew, were wondering what I thought of Robert Chapman. Whether he was worth listening to . . .

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. (“I’m all for reducing the number of public-sector employees,” an IMF investigator had said to me. “But how do you do that if you don’t know how many there are to start with?”) Prime Minister Papandreou presented this bill, as he has presented everything since he discovered the hole in the books, not as his own idea but as a nonnegotiable demand of the IMF’s. The general idea seems to be that while the Greek people will never listen to any internal call for sacrifice they might listen to calls from outside. That is, they no longer really even want to govern themselves.

Thousands upon thousands of government employees take to the streets to protest the bill. Here is Greece’s version of the Tea Party: tax collectors on the take, public-school teachers who don’t really teach, well-paid employees of bankrupt state railroads whose trains never run on time, state hospital workers bribed to buy overpriced supplies. Here they are, and here we are: a nation of people looking for anyone to blame but themselves. The Greek public-sector employees assemble themselves into units that resemble army platoons. In the middle of each unit are two or three rows of young men wielding truncheons disguised as flagpoles. Ski masks and gas masks dangle from their belts so that they can still fight after the inevitable tear gas. “The deputy prime minister has told us that they are looking to have at least one death,” a prominent former Greek minister had told me. “They want some blood.” 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, including a young woman four months pregnant. As they died, Greeks in the streets screamed at them that it served them right, for having the audacity to work. The events took place in full view of the Greek police, and yet the police made no arrests.

As on other days, the protesters have effectively shut down the country. The air-traffic controllers have also gone on strike and closed the airport. At the port of Piraeus, the mob prevents cruise-ship passengers from going ashore and shopping. At the height of the tourist season the tourist dollars this place so desperately needs are effectively blocked from getting into the country. Any private-sector employee who does not skip work in sympathy is in danger. All over Athens shops and restaurants close; so, for that matter, does the Acropolis.

The lead group assembles in the middle of a wide boulevard a few yards from the burned and gutted bank branch. That they burned a bank is, under the circumstances, incredible. If there were any justice in the world the Greek bankers would be in the streets marching to protest the morals of the ordinary Greek citizen. The Marfin Bank’s marble stoop has been turned into a sad shrine: a stack of stuffed animals for the unborn child, a few pictures of monks, a sign with a quote from the ancient orator Isocrates: “Democracy destroys itself because it abuses its right to freedom and equality. Because it teaches its citizens to consider audacity as a right, lawlessness as a freedom, abrasive speech as equality, and anarchy as progress.” At the other end of the street a phalanx of riot police stand, shields together, like Spartan warriors. Behind them is the Parliament building; inside, the debate presumably rages, though what is being said and done is a mystery, as the Greek journalists aren’t working, either. The crowd begins to chant and march toward the vastly outnumbered police: the police stiffen. It’s one of those moments when it feels as if anything might happen. Really, it’s just a question of which way people jump.

That’s how it feels in the financial markets, too. 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. The taxes are lower in Bulgaria, the workers more pliable in Romania. But there’s a second, more interesting, question: Even if it is technically possible for these people to repay their debts, live within their means, and return to good standing inside the European Union, do they have the inner resources to do it? Or have they so lost their ability to feel connected to anything outside their small worlds that they would rather just shed the obligations? 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 government would be punished for many years in the form of much higher interest rates, if and when it was allowed to borrow again. But the place does not behave as a collective; it lacks the monks’ instincts. 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?

III

IRELAND’S
ORIGINAL SIN

W
hen I flew to Dublin in early November 2010 the Irish government was busy helping the Irish people come to terms with their loss. It had been two years since a handful of Irish politicians and bankers had decided to guarantee all the debts of the biggest Irish banks, but the people were only now getting their minds around what that meant for them. The numbers were breathtaking. A single bank, Anglo Irish, which, two years before, the Irish government claimed was suffering from a “liquidity problem,” confessed to losses of 34 billion euros. To get a sense of how “34 billion euros” sounds to Irish ears, an American thinking in dollars needs to multiply it by roughly one hundred: $3.4 trillion. And that was for
a single bank
. As the sum total of loans made by Anglo Irish Bank, most of it to Irish property developers, was only 72 billion euros, the bank had lost nearly half of every dollar it invested.

The two other big Irish banks, Bank of Ireland and, especially, Allied Irish Banks (AIB), remained Ireland’s dirty little secret. Both older than Ireland itself (the Bank of Ireland was founded in 1783; Allied Irish was formed in a merger of three banks founded in the 1800s), both were now also obviously bust. The Irish government owned most of the two ancient banks, but revealed less about them than they had about Anglo Irish. As they had lent vast sums not only to Irish property developers but also to Irish home buyers, their losses were obviously vast—and similar in spirit to the losses at the upstart Anglo Irish. Even in an era when capitalists went out of their way to destroy capitalism, the Irish bankers had set some kind of record for destruction. Theo Phanos, whose London hedge fund has interests in Ireland, says that “Anglo Irish was probably the world’s worst bank. Even worse than the Icelandic banks.”

IRELAND’S FINANCIAL DISASTER
shared some things in common with Iceland’s. It was created by the sort of men who ignore their wives’ suggestions that maybe they should stop and ask for directions, for instance. But while the Icelandic
male used foreign money to conquer foreign places—trophy companies in Britain, chunks of Scandinavia—the Irish male used foreign money to conquer Ireland. Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was buy Ireland.
From each other.
An Irish economist named Morgan Kelly, whose estimates of Irish bank losses have been the most prescient, has made a back-of-the-envelope calculation that puts the property-related losses of all Irish banks at roughly 106 billion euros. (Think $10.6 trillion.) At the rate money flows into the Irish treasury, Irish bank losses alone would absorb every penny of Irish taxes for the next four years.

In recognition of the spectacular losses, the entire Irish economy has almost dutifully collapsed. When you fly into Dublin you are traveling, for the first time in fifteen years, against the traffic. The Irish are once again leaving Ireland, along with hordes of migrant workers. In late 2006 the unemployment rate stood at a bit more than 4 percent; now it’s 14 percent, and climbing toward rates not experienced since the mid-1980s. Just a few years ago Ireland was able to borrow money more cheaply than Germany; now, if it can borrow at all, it will be charged interest rates 6 percent higher than Germany, another echo of a distant past. The Irish budget deficit—in 2007 the country had a budget surplus—is now 32 percent of its GDP, the highest by far in the history of the euro zone. Professional credit analyst firms now judge Ireland the third most likely country in the world to default. Not quite as risky for the global investor as Venezuela, perhaps, but riskier than Iraq. Distinctly third world, in any case.

Yet when I arrived, Irish politics had a frozen-in-time quality. In Iceland, the business-friendly conservative party had been quickly tossed out of power, and the women had booted the alpha males out of the banks and government. In Greece the corrupt, business-friendly, every-Greek-for-himself conservative party was also given the heave-ho, and the new government is attempting to create a sense of collective purpose, or at any rate persuade the citizens to quit cheating on their taxes.
(
The new Greek prime minister is not merely upstanding but barely Greek.) Ireland was the first European country to watch its entire banking system fail, and yet its business-friendly conservative party, Fianna Fáil (pronounced “Feena Foil”), remained in office up until February 2011. There’s no Tea Party movement, no Glenn Beck, no serious protests of any kind. The only obvious change in the country’s politics has been the role played by foreigners. The new bank regulator, an Englishman, came from Bermuda. The Irish government and Irish banks are crawling with American investment bankers and Australian management consultants and faceless Euro-officials, referred to inside the Department of Finance simply as “the Germans.” Walk the streets at night and, through restaurant windows, you see important-looking men in suits, dining alone, studying important-looking papers. In some new and strange way Dublin was now an occupied city: Hanoi, circa 1950. “The problem with Ireland is that you’re not allowed to work with Irish people anymore,” an Irish property developer told me. He was finding it difficult to escape hundreds of millions of euros in debt he would never be able to repay.

Ireland’s regress is especially unsettling because of the questions it raises about Ireland’s former progress: even now no one is quite sure why the Irish did so well for themselves in the first place. Between 1845 and 1852 the country experienced the single greatest loss of population in world history: in a nation of 8 million, 1.5 million people left. Another million Irish people starved to death, or died from the effects of hunger. Inside of a decade the nation went from being among the most densely populated in Europe to one of the least. The founding of the Irish state in 1922 might have offered some economic hope—they now had their own central bank, their own economic policies—but right up until the end of the 1980s the Irish had failed to do what economists expected them to do: catch up with their neighbors’ standard of living. As recently as the 1980s 1 million Irish people, in a nation of a mere 3.2 million, lived below the poverty line.

WHAT HAS OCCURRED
in Ireland since then is without precedent in economic history. By the start of the new millennium the Irish poverty rate was under 6 percent, and Ireland was the second richest country in the world, according to the Bank of Ireland. How did that happen? A bright young Irishman who got himself hired by Bear Stearns in the late 1990s and went off to New York or London for five years returned feeling
poor
. For the better part of the past decade there’s been quicker money to be made in Irish real estate than in American investment banking. How did
that
happen? For the first time in history people and money longed to get into Ireland rather than out of it. The most dramatic case in point are the Poles. The Polish government keeps no official statistics on the movement of its workforce, but its Foreign Ministry guesstimates that, since their admission to the European Union, a million Poles have left Poland to work elsewhere—and that, at the peak, in 2006, a quarter of a million of them were in Ireland. For the United States to achieve a proportionally distortive demographic effect it would need to hand green cards to 17.5 million Mexicans.

HOW DID ANY
of this happen? There are many theories: the elimination of trade barriers, the decision to grant free public higher education, a low corporate tax rate introduced in the 1980s, which turned Ireland into a tax haven for foreign corporations. Maybe the most intriguing was offered by a pair of demographers at Harvard, David E. Bloom and David Canning, in a 2003 paper called “Contraception and the Celtic Tiger.” Bloom and Canning argued that a major cause of the Irish boom was a dramatic increase in the ratio of working-age to non–working-age Irishmen, brought about by a crash in the Irish birthrate. This in turn had been mainly driven by Ireland’s decision, in 1979, to legalize birth control. That is, there was an inverse correlation between a nation’s fidelity to the Vatican’s edicts and its ability to climb out of poverty: out of the slow death of the Irish Catholic Church arose an economic miracle.

The Harvard demographers admitted their theory explained only part of what had happened in Ireland. And at the bottom of the success of the Irish there remains, even now, some mystery. “It appeared like a miraculous beast materializing in a forest clearing,” writes the preeminent Irish historian R. F. Foster, “and economists are still not entirely sure why.” Not knowing why they were so suddenly so successful, the Irish can perhaps be forgiven for not knowing exactly how successful they were meant to be. They’d gone from being abnormally poor to being abnormally rich without pausing to experience normality. When, in the early 2000s, the financial markets began to offer virtually unlimited credit to all comers—when nations were let into the dark room with the pile of money, and asked what they would like to do with it—the Irish were already in a peculiarly vulnerable state of mind. They’d spent the better part of a decade under something very like a magic spell.

A few months after the spell was broken, the short-term parking lot attendants at Dublin Airport noticed that their daily take had fallen. The lot appeared full; they couldn’t understand it; then they noticed the cars never changed. They phoned the Dublin police, who in turn traced the cars to Polish construction workers, who had bought them with money borrowed from the big Irish banks. The migrant workers had ditched the cars and gone home. A few months later the Bank of Ireland sent three collectors to Poland to see what they could get back, but they had no luck. The Poles were untraceable. But for their cars in the short-term parking lot, they might never have existed.

MORGAN KELLY IS
a professor of economics at University College Dublin, but he did not, until recently, view it as his business to think much about the economy under his nose. He had written a handful of highly regarded academic papers on topics regarded as abstruse even by academic economists (“The Economic Impact of the Little Ice Age”). “I only stumbled on this catastrophe by accident,” he says. “I had never been interested in the Irish economy. The Irish economy is tiny and boring.” Kelly saw house prices rising madly, and heard young men in Irish finance to whom he had recently taught economics try to explain why the boom didn’t trouble them. And the sight and sound of them troubled him. “Around the middle of 2006 all these former students of ours working for the banks started to appear on TV!” he says. “They were now all bank economists and they were nice guys and all that. And they were all saying the same thing: ‘We’re going to have a soft landing.
’
”

The statement struck him as absurd on the face of it: real estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than people’s expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become, and flee the market, and the market will
crash
. It was in the nature of real estate booms to end with crashes—just as it was perhaps in Morgan Kelly’s nature to assume that if his former students were cast on Irish TV playing the financial experts, something was amiss. “I just started Googling things,” he said.

Googling things, Kelly learned that more than a fifth of the Irish workforce was now employed building houses. The Irish construction industry had swollen to become nearly a quarter of Irish GDP—compared to less than 10 percent or so in a normal economy—and Ireland was building half as many new houses a year as the United Kingdom, which had fifteen times as many people to house. He learned that since 1994 the average price for a Dublin home had risen more than 500 percent. In parts of Dublin rents had fallen to less than 1 percent of the purchase price; that is, you could rent a million-dollar home for less than $833 a month. The investment returns on Irish land were ridiculously low: it made no sense for capital to flow into Ireland to develop more of it. Irish home prices implied an economic growth rate that would leave Ireland, in twenty-five years, three times as rich as the United States. (“A price/earnings ratio above Google’s,” as Kelly put it.) Where would this growth come from? Since 2000, Irish exports had stalled and the economy had become consumed with building houses and offices and hotels. “Competitiveness didn’t matter,” says Kelly. “From now on we were going to get rich building houses for each other.”

The endless flow of cheap foreign money had teased a new trait out of a nation. “We are sort of a hard, pessimistic people,” says Kelly. “We don’t look on the bright side.” Yet since the year 2000 a lot of people had behaved as if each day would be sunnier than the last. The Irish had discovered optimism.