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Thursday, 15 April 2010

SO IT BEGINZ

Yorgo has made a first move towards dropping the towel today and asked the EC to book a meeting room for a little chat about what might happen if we should want to talk about a bailout - which of course we don't want. Full Greek text here.

On the IMF front, Dominique Strass-Kahn said today:

“Following a request by the Greek authorities, I have agreed to send an IMF team to Athens to begin discussions with the Greek authorities this coming Monday on policies that could provide the basis for Fund financial assistance, under a multi-year program, in the case that the authorities decide to ask for such assistance. The Greek decision to initiate Fund program engagement is consistent with the agreement among European leaders last weekend that financial support from members of the euro area should go hand-in-hand with IMF engagement and financial assistance.”
Our little game of Chicken with the markets was always ill-advised. For one, they are slightly more liquid than our national cookie-jar.

But there is a fundamental reason why it could never work. According to our Government, the bailout does not involve any fiscal policy commitments beyond what we've already promised the Eurozone Finance Ministers. So why play for time by insisting we don't need a bailout? Simple - so we can win some leeway to break our promises once markets have started to chill a little. Anyone can see through this gambit, which is why nobody has any time for our pronouncements. There are, of course, some alternatives.

It is said that, from a game-theoretical perspective, the best way to win a a game of chicken is to make sure your opponent sees you ripping out the steering column.  Wikipedia elaborates:

"One tactic in the game is for one party to signal their intentions convincingly before the game begins. For example, if one party were to ostentatiously disable their steering wheel just before the match, the other party would be compelled to swerve. This shows that, in some circumstances, reducing one's own options can be a good strategy.
The equivalent would be for the Greek government to give up its discretion over fiscal policy in a binding way, to an independent third party unaccountable to Brussels, such as our Central Bank. Or to ensure that we have no legitimate means of asking for a bailout by deselecting our own prime minister and president.

OK, so all of this is a bit extreme. But look at the other, more realistic options:

"Players may also make non-binding threats to not swerve. This has been modeled explicitly in the Hawk-Dove game. Such threats work, but must be wastefully costly if the threat is one of two possible signals ("I will not swerve"/"I will swerve"), or they will be costless if there are three or more signals (in which case the signals will function as a game of "Rock, Paper, Scissors")."
This is the scenario we are stuck with. We only have two signals to chose from ("We will ask for a bailout" / "We will not ask for a bailout") so our threat has to be extremely costly to ourselves. An example would be to force Greek civil servants, pension funds, unions and pensioners to accept payment in Greek bond options. By forcing an enormous chunk of our population to take a leveraged bet on the price of Greek bonds, we can create an immensely costly, irreplicable signal that we are serious about the deficit.

Any other ideas welcome. Just make it quick because we have so little credibility left that news that the IMF negotiators are stranded by volcanic ash have made our 10yr bond yield jump to 7.8% I could get that interest rate on a brand new car, or a sofa, I should think.

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