Euro negotiations

Greek Game Theory

A European Union flag (L) and a Greek national flag flutter as the ancient Parthenon temple is seen in the background in Athens June 1, 2015. Greece and its European creditors agreed on the need to reach a cash-for-reforms deal quickly as Athens missed a self-imposed Sunday deadline for reaching an agreement to unlock aid, sources close to the talks said. REUTERS/Alkis Konstantinidis
Will anything be left but ruins?
  • Why it matters

    Why it matters

    Greece is covering its back in case it has to default on its debts and leave the euro.

  • Facts


    • Greece is racking up debts of €1 billion, or $1.13 billion, a day and using them as leverage against the euro zone.
    • It is also allowing the flight of capital from the country to further increase the cost of its rescue.
    • The moves aim to force the euro zone to provide more financial aid and smooth a return to the drachma if necessary, the author says.
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Game theorists and bargaining strategists know they must think through Plan B because it is the threat on which the bargaining for Plan A depends.

In Greece, Finance Minister Yanis Varoufakis, an expert on game theory, is the hatchet man working on Plan B while Prime Minister Alexis Tsipras advocates for Plan A. Role playing is part of their strategy.

Preparation for Plan B – the Greek exit from the euro – has two elements. First, it requires provoking its citizens in the event of an exit. Without escalating the dispute, the Greek people won’t remain supportive of the government during the tough times that will follow an exit.

Second, it seeks to make the costs of Plan B exorbitantly high for the other side. The Greek government is doing this by allowing its citizens to move their money outside of the country.

Athens could curb the capital exodus if it demonstrated more conciliatory gestures. Or it could use capital controls to prohibit it immediately, but that would impair the threat.

Capital flight doesn’t mean money is migrating abroad in net terms, only that private capital is being exchanged for public capital. Greek citizens are borrowing money from banks that will be offset by the Greek central bank’s emergency loans (its emergency liquidity assistance, backed by the European Central Bank), which then transfers the funds abroad.

The transfers force the central banks of other countries to create new money without granting credit and complying with the payment order. In essence, these central banks are issuing to the Greek central bank an overdraft loan as measured by target balances.

In January and February, Greek target debts increased by almost €1 billion per day and by the end of April had reached €99 billion ($111.8 billion).

If Greece leaves the euro, the Greek capital fugitives will have their assets in a safe place abroad. Foreign central banks will be left sitting on the euro claims against the Greek central bank, which is basically bankrupt because its assets are dominated by the devalued drachma and the Greek state cannot be held liable.

In January and February, Greek TARGET debts – the system for transferring money between central banks in the euro zone – increased by almost €1 billion ($1.13 billion) per day and by the end of April had reached €99 billion. No wonder Mr. Varoufakis and Mr. Tsipras are playing for time and refuse to present a list of real reforms.

This is similar to a Greek citizen withdrawing cash from the bank to hide under the bed or move out of the country. This money cannot be exchanged for drachma and improves the threat point of the Greek government.

The European Central Bank made this enhanced threat point possible because the two-thirds majority the ECB council needs to limit ELA emergency loans didn’t emerge. This was despite the value of the loans having far exceeded the Greek central bank’s volume of recoverable assets, which is about €41 billion.

Greek banks have maintained the liquidity of the emergency loans despite the flight of capital, and at the same time saved the Greek government from having to introduce capital controls.

Greeces Debts-01 repayments due mature maturing bonds greek

There’s no talk of the ECB putting a stop to the ELA loans any time soon. If the ECB does pull the plug, Greece will have to enter into negotiations because its government can no longer improve its threat point by stalling.

But that doesn’t matter because Athens already has succeeded in building up a very strong negotiating position, considering the circumstances. Thanks to the friendly help of the ECB, Greece will likely secure a combination of aid funds and a climbdown on reform requirements, which is substantially more favorable than anything else they would have won earlier.

If it does come down to a Grexit with the net bank transfer of €99 billion out of the country plus about €43 billion in cash, a total figure equivalent to 79 percent of the GNP of 2014, they will get the maximum possible for the transition to the drachma.

And you tell me Mr. Varoufakis doesn’t know the first thing about politics?


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