Dr Kamal Monnoo It all began with three tiny, insignificant and sort of rural banks in Greece one fine morning realising that their financial portfolios had an excessive stockpile of government securities cum assets and a 'lending summary that also in a way only reflected governmental borrowings and, therefore, they needed to do something about it before the spiralling Greek national debt also starts affecting their operational sustainability. As they probed probable exit options, to their horror they quickly realised that their investments into Greek and other European governmental securities were as toxic as perhaps the sub-prime mortgages of a few years back. As the trio struggled to survive and started issuing SOS messages, to the horror of the European Central Bank (ECB) and the European Union (EU), they were woken up to the reality that the closure of these three would only be a tip of the iceberg, which if not arrested, could take down the entire European financial dream with it. Remember, banks normally as a practice do not carry reserves against their lending to their government as it is considered to be a sovereign debt and 'safe The present economic or rather debt crisis in the West is significantly different from the sub-prime crisis of a few years back. In the past, the financial institutions in their zest to make quick money created bottomless products, which on paper looked solid and well structured, but in reality had no real legs to stand on. Once the profiteers made their buck and the skin of the investment got exposed the investors realised that what they were holding had in fact very little value. This led to a sort of mistrust all across, banks stopped trusting banks, inter-corporate and cross-corporate (financial institutions to insurers to real estate firms and beyond) divisions emerged and money flow within the financial markets came to a halt - a financial logjam. The governments had to step in with quantitative easing in order to inject cash flow to get the capital moving again and thereby resume economic activity. However, this time around the damage is being backtracked to the consistent follies of successive governments, who have lived beyond their means, borrowed excessively and spent the borrowed money unwisely. The banks on their part acted naively and shot themselves in the foot by falsely assuming that the governments do not default - a notion that also suited their greed as this way they enjoyed excess liquidity to play with since they deemed it unnecessary and a needless exercise to provision for reserves against a sovereigns debt. In the process what they forgot was that it was the publics savings and the taxpayers money they were playing with, which only comes with an underlying moral and legal responsibility for prudent and ethical fund management. Ironically, we in Pakistan seem to be heading down the same route. The government is on a borrowing binge (nearly quadrupling its debt over the past five years) and worse, it is not spending the borrowed money wisely. The fiscal deficit is swelling in an alarming environment where growth remains very low, public support mechanisms non-existent, below zero job creation ratio (after adjusting for the rate of growth in employable youth) and an ever rising cost of doing business at home that seems to be scaring away both domestic and foreign investors. And amidst this shrunk economic activity, we see an unhealthy concentration of wealth in the hands of a few private banks. Their business plan: Lend to the government at exorbitant rates (16 percent plus) in what it considers as safe lending even if in the process the private sector gets crowded out. Since state lending is neither required to be fully backed by corresponding reserves, nor can fall in the purview of non-performing loans, the models provides for an ideal opportunity to post risk free profits, while maintaining a robust liquidity base. Banks in Pakistan enjoy one of the highest spreads (gap between what they charge from their borrowers and what they have to pay to their depositors) in the organised financial world and with the Pakistan government now accounting for nearly 70 percent of their overall lending portfolio their sovereign debt exposure also stands amongst the highest. On paper though it may depict a perfect illusion where in an economy the financial institutions are strong, posting healthy profits, paying the due taxes, playing their role in directly supporting the state and can be relied upon as safe custodians of publics savings, the reality, however, tends to be dangerously different. While the economy suffers these banks churn out mega profits, guilty of sucking the profitability out of the markets, stifling economic activity and concentrating wealth in only a few hands (primarily their own). Moreover, good financial results do not necessarily reflect efficient management. Their exposure still predominantly remains domestic, which implies that their metal in an international competitive environment remains to be tested and that the results we see are driven largely by a combination of the states facilitation as mentioned above, an absence of effective anti-trust mechanism and a loose regulatory control exercised by the central bank. Needless to say that such direction is tantamount to committing hara-kiri both by the financial institutions and for the economy. For the banks, the assumption of sovereign debt being safe is a myth and history tells us that there is a long list of banks that have suffered, never to recover again, due to governmental defaults and as for the economy, it is never going to progress unless one lets the private-sector juices flow freely because the government has never been known to be an efficient user of capital. Pakistans economy carries a sound potential, especially in wake of the ongoing global economic developments. With agro-based commodities revalued upwards, home remittances by the non-resident Pakistanis crossing a billion dollars per month and international oil prices under pressure, our current account picture looks rather promising provided we can deliver on the governance side. A strong focus on growth also, after a long gap, seems doable as external factors influencing domestic inflation begin to ease, which opens up a host of monetary policy options at home, while the pressure on Pak Rupee should be sustainable as the two dominant world currencies, namely the US Dollar and Euro, themselves are likely to be under pressure owing to respective debt issues at home. There is no point blaming others for our economic impasse or catering to conspiracy theories, because the solutions lie with us. If we can tighten our belt, curtail non-productive borrowing, eliminate corruption, bring transparency and prudence in state spending, motivate our entrepreneurs and remove structural anomalies in our financial outlays, the rest can hopefully take care of itself. The writer is an entrepreneur and economic analyst. Email: kamalmannoo@hotmail.com