Monday December 22, 2014 Search
Weather | Athens
13o C
8o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Cost of collision is too high for both parties

By Dimitris Kontogiannis

As Greek elections get closer, the game of chicken between the country and its creditors is bound to intensify. However, this does not mean that a mutually acceptable solution cannot be found after the elections by having both sides renegotiate some terms of the bailout agreement despite all the current signaling to the contrary from the EU and the IMF. After all, the MoU (Memorandum of Understanding) itself allows for amending or supplementing the conditions from time to time.

Game theory was developed in previous decades to study strategic decision-making by using mathematical models. The study of complex negotiations between intelligent rational parties with different preferences leading to various outcomes was at the center of interest when John Nash, a bright economist, came up with a solution in a game called Nash Equilibrium.

In a game with two players, Nash Equilibrium implies, each player makes the best decision he/she can by taking into account the other player’s decision, but it does not mean the best payoff for all the players.

Back to the present, many economists and commentators think the situation between Greece and its trading partners, mostly Germany, can be described by the so-called game of chicken.

In its typical form, two cars head for a single-lane bridge or at each other from opposite directions. If neither driver backs off, they crash into each other. They both understand the cost of a crash will be too high and each rationally assumes the other will give in.

It is obvious that the worst thing that can happen is for both drivers to collide. The best thing that can happen is for one side not to yield and let the other side become the chicken by conceding. Being chicken is the second-worst outcome, but much better than dying. Still, a cooperative outcome in the game of chicken can be reached when both sides back off, no one is hurt and no one can call the other a chicken.

Incalculable cost

Undoubtedly, the direct costs of a collision between Greece and the core of the eurozone appear bigger for the former. The direct exposure of eurozone countries and the ECB to Greece is estimated around 290-300 billion euros according to two different studies by Barclays and Nomura. Assuming a 70 percent haircut, the total cost is around 200-210 billion euros, which is big but manageable if one takes into account that the economy of the eurozone is around 9.5 trillion euros. Still, some countries like Spain and Italy with exposure of 37 billion and 55 billion euros respectively may find it more difficult to absorb.

However, it is extremely difficult to estimate the indirect cost of a Greek exit from contagion -- this may be quite high if financial markets lose confidence in the eurozone. Moreover, it is reasonable to assume that markets will view a Greek exit as the beginning of of the eurozone’s unraveling. This could change if Germany and other core countries are ready to guarantee the safety of bank deposits and the repayment of debts of other euro-periphery countries, and the ECB is prepared to engage in large-scale interventions in the bond and currency markets. We are not sure whether some of these moves will be approved by Germany’s constitutional court, while others will definitely be in breach of existing EU treaties, further complicating matters.

As far as Greece is concerned, there is no doubt that the economic cost of a euro exit would be catastrophic and have negative geopolitical consequences. Inside the country, the need for law and order, and the descent into economic misery would strengthen the two opposite extremes of the political spectrum at the expense of mainstream parties.

A rational game

So, no rational Greek government would chose to quit the euro unilaterally, especially if one considers the 80 percent approval rating for the single currency. Since it cannot be legally expelled, Greece can only be forced by, let’s say, having the ECB cut off support to the Greek banking system, but this would not look good.

From the point of view of any new Greek government, the preferred strategy would be to negotiate changes in some terms of the bailout agreement by presenting a reasonable plan to put public finances in order and turn around the economy while pledging to stick to structural reforms.

It is hard to imagine how the other eurozone countries will say no to such a plan when the direct costs of a Greek exit are high and the indirect costs are difficult to estimate. Moral hazard may be an argument against accepting such a Greek plan but one should remember that decision-making at the eurozone level, which assigned too much weight to moral hazard, has not produced good results.

If it is indeed a game of chicken between Greece and the core of the eurozone, it is in the best interest of all sides it leads to a cooperative outcome where a collision is avoided. Especially when the possible miss of budget deficit target and the slower pace of reforms call for renegotiation of the MoU regardless of political intentions.

ekathimerini.com , Sunday May 27, 2012 (23:04)  
Alpha Bank Cyprus to absorb local Emporiki
Greeces 10-year bond yield drops 13 bps to 8.30 pct
Traders stay focused on Tuesdays vote
Spanish bond gains push yield to record low as Greek debt rises
Govt seeks better result in second presidential vote as bribe claim probe shelved
With all political parties now actively preparing for the prospect of snap elections, MPs are to vote in the second ballot of a critical three-phase presidential vote at noon on Tuesday. The...
Civil servants to grade evaluation scheme
As of Monday, Greek civil servants are now able to have a say in the public sector evaluation scheme that is currently undergoing fine-tuning by the Ministry of Administrative Reform. By log...
Inside News
SOCCER
Special day for Abidal, lucky one for PAOK
PAOK scraped through its Livadia challenge beating Levadiakos to remain on top of the Super League for Christmas, one point ahead of Olympiakos that enjoyed a great game at Kalloni and offer...
BASKETBALL
Explosive Barca unfazed by Panathinaikos, bomb scare
Panathinaikos lost 80-67 at home to Barcelona on Friday in a rather meaningless game at the end of the first group stage of the Euroleague, but the encounter will be remembered for the bomb ...
Inside Sports
INTERVIEW
Klaus Regling stresses debt sustainability through commitment to reforms
BRUSSELS The man who is responsible for the loans to Greece as managing director of the European Stability Mechanism (ESM/EFSF), Klaus Regling, is the only high-ranking European official w...
INTERVIEW
Crisis of confidence will come back again and again, says Thomas Piketty
Hes treated like a rock star wherever he goes to lecture. His book Capital in the 21st Century, a study on income and wealth inequality from the 18th century to the present, recently tran...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
RECENT NEWS
1. Govt seeks better result in second presidential vote as bribe claim probe shelved
2. Civil servants to grade evaluation scheme
3. Police collar fraudsters who conned money out of jobless
4. Bill aims to close down landfills, curb EU fines
5. Alpha Bank Cyprus to absorb local Emporiki
6. Greeces 10-year bond yield drops 13 bps to 8.30 pct
more news
Today
This Week
1. Prosecutor gathers depositions in Independent Greeks 'bribe' probe
2. Euro shaky on ECB and Greece, dollar keeps edge
3. Greek parliament vote in balance after Samaras election offer
4. Government accuses SYRIZA and Independent Greeks of 'clear alliance'
5. Draghi starts squaring QE circle in month of persuasion for ECB
6. Klaus Regling stresses debt sustainability through commitment to reforms
Today
This Week
1. Samaras summons bond vigilantes with euro exit talk
2. High stakes
3. Europe's drama in Greece needs final act to avoid tragedy
4. A friendly yet firm message from Pierre Moscovici
5. On the edge but not gutless
6. Ship with 200 migrants off Pylos towed to Italy after passengers refuse to stop in Greece
Find us ...
... on
Twitter
... on Facebook
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright 2014, H KAΘHMEPINH All Rights Reserved.