The Financial Mess Facing the Vatican

0:04It was winter at the Vatican, and Pope Francis was desperate. Francis sat in a reception room short of breath. Aides shuffled in and out as the Pope worked through what he thought was a bad cold. And advisors and Vatican officials are coming in and presenting the details of a city-state, effectively, that is awash in priceless treasures but is falling deeper into debt. Our colleague Drew Hinshaw spoke with us from Rome. How much did the finances of the Vatican actually kind of weigh on Pope Francis before his death? Right up until the end. That day in February, Francis reviewed documents underneath a cherished painting depicting Mary, undoer of knots.

1:01In it, the Virgin Mary is shown unraveling a long ribbon.

1:08Three days later, Francis was hospitalized with double pneumonia. And on April 21st, he died, leaving his successor with this economic puzzle that one pope after the next has tried to solve. Today, as the College of Cardinals gathers to elect a new leader, a major question looms over the conclave. What will the next pope do about the Vatican's financial crisis? I mean, this is one of the hidden stories of really the modern papacy, is how much the Bishop of Rome is the ultimate bookkeeper for the Vatican. How would you describe the financial mess that this next pope will inherit? I would say unheavenly.

1:57Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Wednesday, May 7.

2:10coming up on the show do the vatican's finances need divine intervention

2:30For all its global influence, the Vatican is tiny. It's the world's smallest country. It sits in the center of Rome, occupying an area about one-tenth the size of Central Park. The Vatican, it's both like, you think of it as the heart of the Catholic Church, but maybe it's better to think of it as like the brain. That's Drew again. You know, it's 900 residents. It's the home of the Pope, you know. And it's where the direction of the church is set, of course, but it's not where the money's made.

3:04The Vatican might call to mind priceless treasures. Gold chalices, the Sistine Chapel, vast cathedrals. But if you look at the religious institution through a fiscal lens, it's actually asset rich and cash poor. You know, the money on Sunday, when the collection plate goes around, that's not really going to Rome. That's going to, you know, your local and national church. It's this odd thing where it's totally paradoxical. This extremely wealthy city-state that's at the center of this, you know, the largest Christian denomination, but it's not where the money is in the Catholic Church. Unlike other countries, the Vatican collects no taxes.

3:45The microstate is increasingly relying on revenue from museum ticket sales and tourism. And that money has to pay for a lot of stuff. It's got to fund a network of embassies all around the world. It's got to fund a small army, the Papal Swiss Guard. It's got to do upkeep on these marvelous buildings that you can stand and take selfies in front of. And it's increasingly dependent on museum ticket sales to do that. This has got to be the only state on earth that depends on ticket sales.

4:24So how bad is the Vatican's financial situation right now? The pension fund is one source told us he used the words five alarm fire. As for the Vatican's budget deficit? It's around 80 million euros, give or take, which is triple what it was about 10 years ago. Wow. It's looking really dire. I want to understand how far back this problem goes. Was there a time when money wasn't a problem for the church? Maybe in the year zero. I'm being a bit... Look, this history really goes back like centuries and centuries, of course. The irony is, look, when you go to the Vatican and you see all these beautiful buildings, you're seeing buildings from an era when paying the bills wasn't very difficult for the Pope.

5:17You know, the Crusades, Sistine Chapel, St. Peter's Basilica, these were all financed, but they were financed through a 6th century invention called indulgences. Although that practice was considered so corrupt, it helped spark the Reformation. For centuries, these indulgences, basically money to reduce punishment in the afterlife, kept cash flowing until the practice ended in the 16th century. The church also made money by taxing the rich Italian farmland it controlled, territory known as the Papal States. And that was a pretty steady stream of income. But that business model fell apart in 1870.

5:58That's when the armies of Italy wrested Rome from Pope Pius IX. And it wasn't until 1929, under a treaty with Italy, that the Vatican became an independent city-state, occupying 0.2 square miles in the middle of Rome. Without taxes, the new microstate needed other sources of revenue. So the Vatican positioned itself as a financial hub, creating its own Vatican Bank. That bank started taking big shares in Italian and European companies. It also started getting mixed up in scandals, including allegations of money smuggling and laundering. Along the way, the Vatican kind of develops this reputation in the 70s and 80s for being like just basically a really shady place to have a bank account.

6:46If you've ever seen Godfather 3, you know, this is basically that era. Oh, if only prayer could pay off our$700 million deficit. 769. There was a kind of mafia-linked financier who, before his downfall, he'd been close to Pope Paul VI, and he had ties to New York's Gambino crime family. Michele Sindona, the Italian financier, convicted of a multi-million dollar fraud that led to the biggest bank failure in our country's history. There was also a huge scandal in the 1980s when the Vatican Bank got caught up in the collapse of an Italian bank, Banco Ambrosiano. And the bank chairman was found hanging under Blackfire's bridge in London.

7:34The man known as God's banker was found hanging from a bridge, his pockets full of cash and bricks.

7:44By the early 2000s, the Vatican's money problems had become pretty dire. Benedict XVI, who became pope in 2005, set up a unit to combat money laundering. And the Vatican Bank started releasing annual reports for the first time. But the financial knots proved to be too much. And every source we've talked to has said that this was a factor in Benedict deciding he would become the first pope to resign since 1415. That's, you know, I remember when Benedict stepped down, and I remember what a huge deal it was. I had no idea it had to do with money problems. Right, right. By all accounts, the headache of trying to clean this up just became a lot for him.

8:30Into this mess stepped Pope Francis. The fight against poverty and hunger must be fought constantly. Francis' election in 2013 seemed to represent a new era of reform. He was known for his frugality, having lived through many financial crises in his home country of Argentina. As Pope, Francis attempted to modernize the Vatican's bookkeeping. Nuns were still keeping ledgers with pencil and paper. Under his stewardship, the Vatican Bank closed thousands of suspect accounts. He slashed cardinal salaries. And perhaps the biggest move of all? He hires, you know, an executive from the accountant firm Deloitte and basically says, brings him into his office and he says, I want you to be independent.

9:16You have my like, go ahead. Blessing. Yeah. Yeah, you have my blessing. I wasn't going to use the word, but you have my blessing to probe our accounts, like, you know, to conduct audits. This was the first time the Vatican had an outside auditor in its modern history. How did members of the clergy in the Vatican respond to these efforts? Not well, I think is one way you could say it. And look, their reasoning is this money is vital. We need it to host a commission of theologians. We need it to buy office supplies, coffee. We need this to run our outfit. And if we have to go through the ropes of getting it from the Vatican treasury, which is this whole other thing that the auditor is looking into, it's going to be really hard and time-consuming.

10:09According to the journal's reporting, one cardinal took cash out of a Vatican bank account with plans to hide the money from a team set up to track budgets. The cardinal's advisor was telling him, we must save our money. And they took money out of the Vatican bank and started storing the cash in a bag. Literally a bag. Wow.

10:36The auditor that Francis empowered to clean up the mess soon had a target on his back. It gets really crazy. I mean, the auditor comes back to his office at one point, and the office has been broken into. It's Monday morning. The bottom of his laptop is unscrewed. There's a spring missing. Wow. And he's spooked. He goes and asks Francis, like, what am I supposed to do? And Pope Francis doesn't really push for an investigation. He just says, let's put security cameras outside the office. The auditor says he hired external consultants to investigate the tampering of his computer and to sweep for bugs in his office.

11:14But in June of 2017, Vatican police detained the auditor on suspicion that he hired private investigators to spy on Vatican staffers. The auditor was pressured to resign. He denies the spying allegation. And that's basically where that auditing effort hits a wall.

11:36Now, the financial woes that plagued Francis will fall to his successor. And now the doors close. You can hear the applause breaking up behind us here in St. Peter's Square. But should the next pope continue his reforms? The clergy is already taking sides. That's next.

12:14The Curia, the church's governing body, is famously secretive. So as the conclave gets underway this week, Drew and his reporting partners, Joe Parkinson and Stacey Mike-Tree, have been holding hushed meetings across Rome. I've reported on, you know, authoritarian countries, and I've rarely encountered the kind of just evident nervousness in talking to the press that you encounter here in the center of Rome when you're trying to, you know, answer questions about the budget deficit of the Vatican. Drew and the team met with officials from the Vatican's bank, pension fund, and regulatory institutions, and with cardinals attending the conclave.

12:52We had one guy sit down with me near midnight in a piazza, and one of his first questions for me was, you're not recording me, are you? Because if you're recording me, this interview's over. And of course we weren't, you know, but it's all fairly cloak and dagger here. But you did manage to get people to talk to you. Mm-hmm, yeah. What did you hear? People are quite alarmed. Ahead of the start of the conclave, Cardinals held multiple sessions to discuss the financial crisis. One big issue is the pension fund for aging clergy members. The fund is facing about 2 billion euros in liabilities. But the culture of financial mismanagement is also a wedge issue.

13:37There's kind of two camps. There's one that can see it in the kind of dollars and cents terms that we're discussing it. But there's others who say, look, we're here to talk about matters of God, of spirituality. Why are we talking about these earthly concerns that are secondary to our mission of saving souls? And, you know, the church has been around for 2 ,000 years. There's a feeling of this is, if, look, if you were running a country, just a kind of a totally secular, small municipality of 900 people, and you had these kind of budget deficits, you'd be freaking out. But when underneath that municipality is 2 ,000 years of history, I think you think, well, you know, we've survived before.

14:19What happens if the next pope either does nothing or isn't able to solve this problem? Is this existential for the Catholic Church? The way this was put to me is that they can't just keep kicking the can down the road. They're going to have to do things that are undoubtedly going to be painful for clergy who are expecting to, you know, be able to retire and who have obviously fixed salaries and, you know, who have one profession. Everybody we've talked to sees only painful choices ahead. It might mean more salary cuts, reducing core missions, hiking museum fees, overhauling the Vatican Bank. But there's one seemingly obvious solution to this whole money problem.

15:07So Drew, can you explain to me, how can the Vatican be in such a financial mess if it's also sitting on this pretty unimaginable wealth of art and history, right? They've got the manuscripts and the Vatican Library. They've got works of art from Da Vinci and Michelangelo. Couldn't they just sell that stuff? The Vatican has no intention of ever selling off its inheritance. In fact, it lists many of its kind of priceless works of art, including the Sistine Chapel, on its books at a nominal value of one euro each, which is a way of saying these things are of religious and artistic and historical significance, not of financial significance.

15:48It would never ever part with its, this is its patrimony. For the people most concerned about the Vatican's books, their hope is that the conclave will elect someone who can tether heaven to the ground. A pope who is part saint and part CEO. There's like this incredible paradox at the center of this. you have a country that has immense wealth, but it's unable to sustain its basic functions without running a deficit.

16:20It's got all these people who work in finance who are basically in the Vatican running its bank and everything else. But at the end of the day, the decisions are taken by clergy who quite honestly could talk to you more about gospel or Acts or the New Testament or the Old Testament than the nuts and bolts of an audit. It's where two realms kind of meet, isn't it? Yeah. Literally like the earthly and the heavenly, I guess. The spiritual. Yeah, exactly. Yeah. Yeah.

16:55On the one hand, cardinals are electing someone who is very pointedly in charge of the biggest issues in life, theology and spirituality and life after life and doing good in the world and all the things that are core to the Christian gospel. But they've got this kind of dollars and cents problem that they also have to solve. And the idea that one person is going to be good at both of those issues, it's, I don't know, seems like a lot to ask of one human being.

17:41That's all for today, Wednesday, May 7th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode from Joe Parkinson and Stacey Miktree.

17:54Thanks for listening. See you tomorrow.