Game Theory, Grexit and Chicken

 “The simplest way of thinking about it ( Grexit) is a game of chicken…the two sides ( Germany and Greece) resemble drivers heading for a single lane bridge from opposite directions.”

– George Tsebelis, Professor, University of Michigan

In game theory there is a game called Chicken. The game is designed to test the nerve of the players involved. In this game two people each get into the driver’s seat of a car and drive straight towards each other at top speed in single lane, the first to swerve out of the impending head-on collision is the “chicken”. Nobody wants to be called as “chicken”, but if no one swerves out then there head-on collision.

chicken 2

After becoming member of Eurozone, Greece kept borrowing money from European Banks, and spent it on paying salaries and pensions and on public welfare. Had this money been used in initiatives to boost economy it would have benefited Greece, instead it spend it welfare, which did not help economy. Soon Greece was in debt; at present debt is 200% of its GDP. The lenders are European Banks, members of Eurozone (mainly Germany) and IMF.

greek dilemma

Since Greece was unable to manage its expenditure i.e. control debt, it asked for bailout. But bailout came with condition that Greece will observe austerity i.e. control its spending. But this did not improve situation as austerity measures were partly implemented and money was spent on interest payment. Result was debt burden increased, GDP went down and unemployment rose. Now Greece is due to make a €1.6bn payment to the International Monetary Fund (IMF) tomorrow i.e. 30th June 2015, but Greece does not have money to make payment so is going to default.

greek drama

Now the game of chicken starts, banks are in no moods to offer another bailout or give any concessions, as doing so will send wrong message to countries like Spain and Portugal whose financial situation is not very different from that of Greece. They too will seek bailout. But rigid stand by banks will result in Greece opting out of Eurozone (called as Grexit- Greece Exit) and shifting to their earlier currency Drachma. This means banks will be unable to recover billions of Euros they have lent to Greece, leading to global financial crisis.

chicken

“I don’t believe in this game-of-chicken rubbish…We don’t know what the risks are.”

– Jeroen Dijsselbloem,Dutch Finance Minister

Greece on the other hand by exiting Eurozone will get into financial crisis; it will not be able to get loans from banks anymore, and Drachma will lose its value. This will further increase crisis as government will have little money to pay salaries, pensions and spend on public welfare, which in turn will increase unemployment which today is at 25%. But accepting terms of Eurozone would mean political crisis as it will be seen as humiliation by Greeks. Most of the Greeks are blaming their current problems to austerity measures.

greek economy

If both take rigid stand, head-on collision is unavoidable, this is turn will hit global economy and will again result in another cycle of recession.

So who will blink first?

pay bill

“The Greek government cannot announce a policy of leaving the euro — and I’m sure it has no intention of doing that…And if Greece is in effect forced out of the euro, what happens to other shaky members? I think I’ll go hide under the table now.”

-Paul Krugman Nobel prize-winning economist

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