In Greek Debt Puzzle, the Game Theorists Have It

http://www.nytimes.com/2015/06/05/business/in-greek-debt-puzzle-the-game-theorists-have-it.html?partner=rss&emc=rss&_r=0

by Luc • 11 years ago

69 50 11 years ago

nytimes.com

wsc981• 11 years ago

I thought George Friedman had some interesting perspectives on the Greece, Germany and the dept crisis.

In this video [0], Friedman explains that keeping all countries in the Euro is very important for the German economy (export + welfare state). And it seems the Greece government uses this knowledge in their negotiations with the EU.

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[0] https://www.youtube.com/watch?v=QeLu_yyz3tc&t=1545

netcan8• 11 years ago

Wow. Fascinating perspective.

I had just commented with my own bias/perspective on what the central problem is (I have some background in economics, hence a relatively mature opinion set) and this is another undeniably key piece of the problem, this time from a political economy rather than an institutional perspective.

I will definitely follow this guy. Very convincing. thanks

ExpiredLink2• 11 years ago

Greece is 2% of the EU economy ...

netcan8• 11 years ago

..but more than 2% of germany's export market. Also, Greece is a sort of canary for larger countries: Italy, Spain, Portugal, and to an extent, France.

zhte4152• 11 years ago

Germans have to put their money somewhere. A significant proportion of the Eurobubble / PIGS mess was German savings leading to German banks funding banks in outer Eurozone that in turn funded bubbles and speculation, and the bigger the bubble, the more they received from German banks.

furyg3• 11 years ago

There are some perspective's that think that having the Greece in a crisis (but not a collapse) is also very useful for countries like Germany because it weakens the Euro which strengthens their exports.

netcan8• 11 years ago

Virtually everyone agrees that a default by Greece is the least desirable outcome for both Greece and its creditors

That, I think is a key part of the problem. In the US context it's known as too big to fail and applies to banks. In Europe it's unnamed.

The reality of every loan and every indebted entity is that default is a possibility. For a state to essentially become insolvent is no less likely than an individual or company. For some countries it is virtually inevitable on a 10-20 year scale. Before the euro, Greece dealt with this like all other countries, by printing money. They use the cash to pay debts and the resulting inflation actually helps manage national finances, that tend towards inefficiency and overpayment to vendors, employees, etc. If loans are denominated in foreign currency, debtors do not participate in the "haircut" and the danger of inflation notches up a bit.

No one thinks this is an ideal system. It's certainly not better than not becoming insolvent, but it usually works.

The Eurozone took this away without providing a working alternative. They solved liquidity issues using bailouts, emergency loans and nationalisation of debts and bad assets, but liquidity<>insolvency.

simonh• 11 years ago

So essentially back when Greece had it's own currency, it could decreate the cost of e.g. it's pension payments by printing more money, decreasing the value of the payments without decreasing the face value of the pyments. They'd pay pensioners the same amount in drachmas, but those drachmas would be worth less. Now they are part of the Euro, the only way to cut the cost of their pension payments is to actualy cut how many Euros they pay to pensioners.

For ideological reasons, the Greek government isn't willing to do that. Membership of the Euro is a lens that reveals exactly how many clothes the Emperor is or isn't wearing.

kokey• 11 years ago

Perhaps they need a solution inspired by the Brazilian Real. Pay government salaries and pensions in a different currency, called the 'faux' or something. The value won't change, but how many Euros you can get for 1 faux would depend on supply/demand.

netcan8• 11 years ago

Yes, basically.

Pension payments and debt repayments are both part of the general "national deficit." Printing money directly plugs the hole. Printing money causes inflation, so it also also makes the hole smaller.

A Keynsian might say that salaries (and other prices) are "sticky" and can't be adjusted down like the price of petrol. Prices need to go down in a business cycle low point (which often happens simultaneously to debt repayment problems). So the inflation is a good thing in addition to the more commonly quoted Keynsian suggestion that government spending shouldn't be cut (austerity).

A classical liberal perspective would just see this whole manoeuvre as default or a tax equivalents. Paying back debts with debased currency is a default and printing drachmas is a tax on whoever holds drachmas.

Both agree that if you do this too much the currency becomes unreliable and contracts start to be denominated in a foreign currency or inflation adjusted. This makes the inflation problem worse because nominal prices and debt repayments go up when inflation happen. You need to print more to get the same effect, causing more inflation...

With regard to pension payments, I am a little more cynical. I think the Greek Government was happier to write the contract than make good on it. The pensions were promised many governments ago, and the political gains have already been had. Paying them was left to future generations. Taken together, all these promises add up to more money than they have. The current debts are a manifestation of this "pass it forward" politics. To be both ideological and realistic, they could have set aside money as the liability accrued rather than promising that future generations would pay it without worrying about how.

I don't like these "Emperors Clothes" slogans. They are too easy for politicians to sound like they are making a point without (necessarily) having any content. We should hold leaders to a higher standard, not accept rhetoric that skips over important questions with slogans. An ideological position is good, but it also needs a plan for how to make it happen.

Also, I think if the Greek government could print money, devalue the pensions and get out of this mess they would. They did it when they could.

For a different (and very valid) perspective, see the vide linked by wsc981. For a very simplified synopsis: Germany loaned Greece money so they could buy german goods. Greece consumed the goods. Germany accumulated the wealth as debts owed to them by Greece. EU policies were encouraging this dynamic.

My personal feeling is that this is not a victim/culprit situation. Greece's political imperative was consumption , they wanted loans for this. Germany's was exports (and subsequent economic benefits like jobs, accumulating bank wealth..)

worth watching.

StavrosK3• 11 years ago

It's not just ideological reasons. If your pension gets cut, you suddenly can't make rent. If your currency inflates, you can still make rent, because your rent inflates just as much as your pension does.

danieltillett• 11 years ago

The Greeks might have a problem with corruption, but they are not stupid. They will find a way through this mess, but I suspect it won't be pretty.

coldcode• 11 years ago

The complexity of human behavior and the inability to model the real world makes these types of "games" interesting to watch, unless of course it's your money on the line.

The illustration of the three-sided chessboard was fascinating.

yk2• 11 years ago

The important thing about the three sided chessboard is, that one or more parties may actually play capture the flag.

netcan8• 11 years ago

It would be fun to play, especially if it was online and anonymous.

To win, you need to destroy one player with the aid of a second and remain strong than your ally. Committing pieces to offence would leave you vulnerable, but successful attack could earn you queens.

ExpiredLink2• 11 years ago

Some are painfully aware of the disaster that awaits Europe if Greece defaults. Others are less aware. Some are utterly unaware. They think it can be contained.

Greece's default is as important for the EU as Detroit's default was for the USA. The rest is media burlesque.

throwaway12357• 11 years ago

What would be the impact on the Euro currency if Greece left the Euro-zone?

I would guess the Euro would take a small hit, but bear (speculation) wouldn't have much too feed upon.

This due to the fact that (1) Greece is a small part in the Eurozone and (2) the other countries that were having problems (Portugal, Spain, Italy, Ireland) seem to have things stabilized.

zhte4152• 11 years ago

I imagine the effect would be 'is this contagion'?

But perhaps a fear of bipolar contagion - will other weaker economies leave (and the Euro become increasing like the Deutschemark - high, stable, low interest rates) or will Germany leave (and the Euro become a currency associated with volatility).

thyrsus• 11 years ago

Is the current government having any success pursuing tax fraud, which might account for more than half the government's deficit?

http://www.economist.com/news/europe/21565657-greek-tax-dodg...

LukaAl• 11 years ago

I found no number to say Yes or No but the past plans was naïve at least on this topic. A big reason for this it is that the constituency of all parties play with tax fraud.

_cipher_• 11 years ago

The sad thing in this (politics) is that no one gives a sh!t about real people and real situations besides imaginary currency.

Over the last few years, while Greece sinks slowly due to financial situation, IMF and Germany won't back on austerity measures demands. Even if, in reality, those measures are making the country sink even deeper due to very low income and chopping away peoples' pensions.

As I live in Greece, I can say for sure that the situation is getting worse and worse over time. While Greece took huge loans over the last few years, almost everything went to fuel German and French banks so they won't collapse. Very little -if anything- was used to help the situation. But not even those same countries acknowledge that fact. They demand "their" money that used to fuel their banks. Smart thing (not).

Of course I could be a troll and mention that after WWII Germany received a lot of help to be able to reconstruct the country, even if they slaughtered millions across Europe. But that's politics. ;)

Personaly, I'm tired of all that bs. Europe is _not_ a union and this situation is getting out of hand. Supposedly "friendly" countries demanding everything from another member of the "union" is not what Europe was -supposedly- all about.

At least with a new government that is able to say the word 'no' for a change, almost anyone can see the true face of European "union".

Retric2• 11 years ago

Even if every Euro of Greece's debt was gone tomorrow the country would still need more money every month than it gets in taxes. That's a long way from Austerity.

There unbalanced budget is 100% Greece's fault and has absolutely nothing to do with the EU. Long term the government has three options, collect more taxes, pay fewer benefits, fail. It's obvious which one Greece wants.

PS: Actually paying down their debt is another issue and would require Greece to maintain a surplus. Though, if they had that surplus they could just default and probably be better off.

taki13• 11 years ago

Somehow never was true with Iceland. They never repaid and they are just fine. Actually better than fine. I still remember all this fear-mongering coming from mainstream (i.e. the Economist) that the world will come to an end for Iceland if they don't repay. Nothing happened. They are in much better position than Greece. But they said no to EU demands. They said no to IMF demands. They showed big finger to bankers. And that's the lesson for Greece. They should quit Euro (Merkel will never allow because others would follow suit) and debase currency. Do exactly as Iceland did.

calibraxis• 11 years ago

Is it then the US's fault, for supporting the Greek dictatorship which incurred a large part of the debt? (http://en.wikipedia.org/wiki/Greek_military_junta_of_1967%E2...)

Or is it Germany's fault, because Europe wrote off most of their debt in the 1953's (despite being LITERALLY Nazis...), yet they want to savage a populace for illegitimate odious debt, as well as "payments to Greece" which actually went to French and German banks? (http://www.euronews.com/2015/04/17/chomsky-says-us-is-world-...)

taki13• 11 years ago

Couldn't agree more. Government Bonds (like US Treasuries) can go to zero. Really. Like any other investment. German and French Governments demanding from Greece paying off debt like the bonds are still in 2007 is insane. If bankers took risks bought an asset class without doing their homework and then the asset class goes to zero, our response is to pretend it is not zero and pay off bankers? I'm sorry but I thought capitalism is all about risk and reward. They took their risks, they made mistake, the Market should put them back into their place, so others can learn on it. But none of this counts when you can call up die Frau (Merkel) and extort money.

yk2• 11 years ago

Indeed. Unfortunately the German economic policy debate is stuck in a past that never happened.

rbehrends• 11 years ago

Of course I could be a troll and mention that after WWII Germany received a lot of help to be able to reconstruct the country, even if they slaughtered millions across Europe.

Well, I'm German, and I think that this is an extremely pertinent point. The German economic recovery after WW2 should have been a blueprint for how to deal with the Greek situation. Germany received both cash infusions (the Marshall plan) and benefited from the deferral of debt (the London Agreement on German External Debts) that required Germany to only repay debts when a trade surplus allowed for it. It was a strategy that allowed both economic growth and debt service. Instead, Greece was strangled by an austerity regimen that impeded economic growth and as a consequence also made it impossible for Greece to fix its debt issues.

Yes, the Greek government was cooking the books when it joined the Euro, but as you correctly point out, that doesn't even come close to starting a couple of world wars. Policy-making should focus on fixing economic problems (that 99% of the population aren't responsible for), not exercises in finger-pointing.

venomsnake• 11 years ago

A greek default is not greek problem but a german one. Let them default. The Greek economy cannot realistically be more harmed. And Greece will still be in the EU with the access to free travel and open market. No harm done.

chrisbennet• 11 years ago

"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." - J. P. Getty

pdkl95• 11 years ago

Greece? Hmmm...

    You borrow at one and buy at ten
    You use the spread to bury the dead
    You bank it at four and Repo more
    Then go knock on the ECB's door

If you want a detailed explanation of how that trick worked - the moral hazard trade that European banks took advantage of when the Euro centralized money bu not monetary policy - and how a lot of people are trying to blame sweep that under the rug and get other people ("the poor", mainly) to pay for it by blaming Greece and insisting on dangerous austerity programs, highly recommend Mark Blyth's[1] recent lecture[2].

[1] Prof. econ, Brown University and hilarious lecturer

[2] https://www.youtube.com/watch?v=B6vV8_uQmxs#t=673 (note: #t=673 to skip the unnecessary introduction)

JamesBarney• 11 years ago

Just to help correct a common misunderstanding that I've seen popup in thus thread. Greece is running a budget surplus. The government is not spending more than it's taking in[0].

[0]http://www.wsj.com/articles/greece-misses-target-on-budget-s...

In Greek Debt Puzzle, the Game Theorists Have It

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