The Greek Debt Crisis: Weekend at Zorba’s

The ongoing saga of Greek’s debt crisis reminds me of the 1980s comedy Weekend at Bernie’s. The premise of the movie is that two young auditors figure out that someone is stealing millions from the insurance company for which they work. They take this information to their boss, Bernie, not knowing that it is Bernie himself who is, with the aid of the Mob, ripping off the firm. Bernie’s graft supports his cocaine habit, his Ferrari, various girlfriends and the massive weekend parties at his monster house on the beach.

Bernie decides the solution to their discovery is to have his organized crime confederates kill the two employees. He invites them to his beach house for the weekend, where the mob hit man is to whack them. Instead, the guy kills Bernie. When the two friends show up at Bernie’s beach house, they find Bernie dead and learn the mob is determined to make them likewise.

As in many really funny movies, a thin premise provides an excuse for a variety of slapstick hilarity, in this case involving Bernie’s corpse. The rest of the weekend is spent dragging Bernie’s stiffening remains around the Hamptons, making it appear the dead crook is still alive in order to keep themselves from being killed. In one classic scene, the two young guys tie their shoes to Bernie’s, drape his lifeless arms across their shoulders, and walk around town.

Europe finds itself in a similar situation today, with Greece in the role of the dead guy and France and Germany in the role of the anxious friends, staggering around trying to make the dead seem animated in order to protect their own interests. Instead of Weekend at Bernie’s, call it Weekend at Zorba’s, after the charismatic, high-living Greek of Nikos Kazantakis’ novel and the 1964 movie with Anthony Quinn.

Greece’s sad story is now public knowledge. Greek government debt stands at more than 150% of GDP, and is trading at 40 cents on the dollar in secondary markets, indicating a powerful expectation of default. For years, the country cooked its financial books with the aid of American investment firm Goldman Sachs.

The Greek budget deficit was more than 15% of GDP in 2009. Enforced austerity has already caused more than a 10% contraction in economic activity. With more than 40% of the working population employed by the public sector, there is powerful pushback from labor unions against further cuts. Tax evasion is so ubiquitous that the city of Athens uses Google Earth to examine the backyards of its residents, looking for swimming pools that are evidence of higher incomes hidden from taxation. (The taxpayers remain one step ahead of the tax collectors, covering their pools with custom covers designed to look like ordinary backyards.)

Why do France and Germany care if Greece is unable to service its debt? After all, Germany has returned to solid growth, and its unemployment rate is, for the first time in a generation, lower than that in the U.S. In early August all three ratings agencies re-affirmed France’s AAA credit rating. Why put their own finances at risk providing endlessly-escalating bailouts to feckless Greece? Certainly not because the bailout is popular among their own citizens. Germans, who these days cannot retire until age 67, are not generally happy about bailing out Greek bureaucrats who can retire at 52.

And why does Greek’s financial crisis matter to anyone but Europe? How can worries about Greece, with an annual GDP of less than $320 billion, have caused the U.S. stock market to lose over $1 trillion in value in recent months?

The reason is contagion. Weekend at Zorba’s has been at the box office for so many weeks because the two still-solvent countries have such powerful reasons to deny the ruin of the third. Greece owes much of its debt to French banks, who might find their capital bases compromised if they were forced to recognize a Greek default on their books. If French banks fail, other banks follow, and credit dries up throughout the European Union.  Cue Worldwide Credit Crisis, the Sequel. (The first showing of this particular drama got awful ratings, and nobody much wants to see the next one.[1])

In the end, Europe’s Weekend at Zorba’s is no comedy. Whatever the outcome, Bernie (Greece) is dead, condemned by past profligacy, present corruption and future over-commitment to near-term economic contraction, followed at best by long years of slow recovery. Right now the smart money is torn between thinking Greek debt will cause a run on Europe’s banks, and a sense that the European Union will muddle through sufficiently to isolate Greece, pull the PIIGS back from the brink, and return to slow growth with Germany as the engine.

We don’t rely on predictions to manage money. I will observe that the degree of fear associated with Greek debt usually correlates with long-term investment opportunity.  Short-term, we’ve got our seat belts fastened and we are expecting turbulence.

[1] By the way, there was a sequel to Weekend at Bernie’s, which was both utterly unfunny and shockingly racist.


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