Should Greece default on its debts and leave the euro? [EPA]
The Smurfs, these lovely little blue cartoon people are on my mind a lot lately. I used to watch them a great deal when I was growing up. Jokey Smurf is by far my favourite character. He had one trick that he did rain or shine on every episode. He used to offer people an exploding gift box, and just before it would go off he would say "surprise!"
Despite the predictability of it, it was still so so so funny. So what has this got to do with the current financial woes of the world?
I think everything.
We all have been playing pass the parcel, or this case, pass the exploding gift box with our debt. But this time around there is nothing funny about the predictability of what it could do when it explodes - and for sure it will unless we let some of Europe's banks pay for their reckless behaviour.
Government opt out
So how exactly did this game start?
Well, governments decided to opt out of our lives by not providing cheaper houses, decent pensions and good affordable education. And with real wages stagnant or declining for the past couple of decades, we had to turn to the banks to survive. We just had to! They knew it and so did our governments.
We went to the banks for our mortgages, for our pensions, for our children's education - we become indebted. And that is how the pass the debt parcel game began.
We had debt on our mortgages held by the banks. The banks in turn sliced and diced our mortgages and wrapped them up with shiny paper and a bow to create Jokey's exploding gift box. They called these collaterised debt obligations or CDO's - that is subprime toxic debt.
And when it exploded governments had to bail out the banks, so the gift box was passed onto them. And to keep depression at bay, to keep us in jobs and to stimulate the economy, governments had to spend money. So they too became even more indebted. Governments like Greece, Spain, the UK and Portugal borrowed money from ... you guessed it ... the banks.
So now banks in Germany, France and other countries are holding the exploding gift box. Worse still it appears that American banks are exposed to Europe's banks as well.
Irwin Stelzer, the director of economic policy at the Hudson Institute, confirmed this point in The Sunday Times newspaper:
"Adding to uncertainty is the discovery that American banks are more exposed to the problems of Europe's banks than had been realised. Indeed, our banks are now so nervous about the possible weakness of so-called counterparties that they are demanding higher interest rates on interbank lending."
So what started in 2007 as a banking crisis in the US has ended up being another banking crisis in 2010 but this time in Europe and started by the debt of small countries instead of subprime debt.
Less advanced economies stood no chance of competing with Germany [AFP]
Losing control
The question now is how will this particular pass the parcel continue - will we have to step in and bail out the banks again?
You will notice that this is not a question many are asking. Instead everyone is saying "should we bail out Greece, or Portugal, or Spain?"
But what no one is really telling us is that the $1 trillion package provided by the EU to supposedly save its poorer periphery economies is in fact a banking bailout.
Did you know that 80 per cent of all the savings the Greeks will make through their austerity measures will go directly to German and French banks?
In fact, Greece and Co. are being used as a vehicle to funnel and transfer much of the bailout money to German and French banks. That is the truth. Something that Germany's political leadership goes out of its way not reveal to us.
Instead they express their outrage, anger and dare I say Greek xenophobia! They say the Greeks are profligate, spenders, lazy. They do not tell us, for example, that many of the periphery countries had to borrow because they could not compete against Germany.
Being part of the euro meant that these countries lost control over their interest rates and their currency - all these were set mostly to suit German needs. But Germany's economy was so much more advanced than those of Greece and Co. that these countries lost out greatly as a result of joining the euro.
Moreover, Germany kept its wages frozen for a good 15 years, so these less advanced countries had no chance of competing against her.
Many such as Portugal, in fact, ended up importing a fair bit from Germany as their products were so much cheaper.
So, with the inability to sell or produce very much, they found that German and French banks were more than happy to make up for that income deficit by lending to them.
This is how this particular European pass the debt parcel began.
Where the buck stops
I fear though that without some form of debt restructuring, Greece's debt gift box will explode - tearing the country and Europe apart.
Restructuring means allowing the European banks holding much of the country's sovereign debt to take some kind of a loss.
In no other way can Greece pay back its debt - as the debt stands right now it might take the country a century to pay it back, and the austerity measures imposed upon it will send it into a cruel depression for just as long!
Professor Costas Lapavitsas from the University of London's School of Oriental and African Studies, whom I interviewed a week ago, went a step further, saying that Greece should not bail out the banks - that it should, instead, default and say "no" to its creditors.
He said:"I think the Greek people have been sacrificed - the austerity [measures] imposed on the Greek people aim fundamentally ... to save the banks - not very much the Greek people at all. I will argue that the Greek economy right now will benefit from defaulting, and from exiting the euro and the devaluation that could follow, and if handled well, it will [introduce] structural change within the economy with the interests of the many and not the few ... [putting it] on [a] new growth path."
This might finally break this deadly pass the parcel game and actually teach the banks that they cannot act recklessly and so speculatively and assume that they will always be bailed out. It might teach them that there are consequences to their actions and that the buck finally has to stop with them!
Now, in the words of Jokey Smurf that indeed would be a "surprise"!
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