MUNICH – Game
theorists know that a Plan A is never enough. One must also develop and
put forward a credible Plan B – the implied threat that drives forward
negotiations on Plan A. Greece’s finance minister, Yanis Varoufakis,
knows this very well. As the Greek government’s anointed “heavy,” he is
working Plan B (a potential exit from the eurozone), while Prime
Minister Alexis Tsipras makes himself available for Plan A (an extension
on Greece’s loan agreement, and a renegotiation of the terms of its
bailout). In a sense, they are playing the classic game of “good cop/bad
cop” – and, so far, to great effect.
theorists know that a Plan A is never enough. One must also develop and
put forward a credible Plan B – the implied threat that drives forward
negotiations on Plan A. Greece’s finance minister, Yanis Varoufakis,
knows this very well. As the Greek government’s anointed “heavy,” he is
working Plan B (a potential exit from the eurozone), while Prime
Minister Alexis Tsipras makes himself available for Plan A (an extension
on Greece’s loan agreement, and a renegotiation of the terms of its
bailout). In a sense, they are playing the classic game of “good cop/bad
cop” – and, so far, to great effect.
Plan B comprises two
key elements. First, there is simple provocation, aimed at riling up
Greek citizens and thus escalating tensions between the country and its
creditors. Greece’s citizens must believe that they are escaping grave
injustice if they are to continue to trust their government during the
difficult period that would follow an exit from the eurozone.
key elements. First, there is simple provocation, aimed at riling up
Greek citizens and thus escalating tensions between the country and its
creditors. Greece’s citizens must believe that they are escaping grave
injustice if they are to continue to trust their government during the
difficult period that would follow an exit from the eurozone.
Second, the Greek
government is driving up the costs of Plan B for the other side, by
allowing capital flight by its citizens. If it so chose, the government
could contain this trend with a more conciliatory approach, or stop it
outright with the introduction of capital controls. But doing so would
weaken its negotiating position, and that is not an option.
government is driving up the costs of Plan B for the other side, by
allowing capital flight by its citizens. If it so chose, the government
could contain this trend with a more conciliatory approach, or stop it
outright with the introduction of capital controls. But doing so would
weaken its negotiating position, and that is not an option.
Capital
flight does not mean that capital is moving abroad in net terms, but
rather that private capital is being turned into public capital.
Basically, Greek citizens take out loans from local banks, funded
largely by the Greek central bank, which acquires funds through the
European Central Bank’s emergency liquidity assistance (ELA) scheme.
They then transfer the money to other countries to purchase foreign
assets (or redeem their debts), draining liquidity from their country’s
banks.
flight does not mean that capital is moving abroad in net terms, but
rather that private capital is being turned into public capital.
Basically, Greek citizens take out loans from local banks, funded
largely by the Greek central bank, which acquires funds through the
European Central Bank’s emergency liquidity assistance (ELA) scheme.
They then transfer the money to other countries to purchase foreign
assets (or redeem their debts), draining liquidity from their country’s
banks.
Other eurozone
central banks are thus forced to create new money to fulfill the payment
orders for the Greek citizens, effectively giving the Greek central
bank an overdraft credit, as measured by the so-called TARGET
liabilities. In January and February, Greece’s TARGET debts increased
by almost €1 billion ($1.1 billion) per day, owing to capital flight by
Greek citizens and foreign investors. At the end of April, those debts
amounted to €99 billion.
central banks are thus forced to create new money to fulfill the payment
orders for the Greek citizens, effectively giving the Greek central
bank an overdraft credit, as measured by the so-called TARGET
liabilities. In January and February, Greece’s TARGET debts increased
by almost €1 billion ($1.1 billion) per day, owing to capital flight by
Greek citizens and foreign investors. At the end of April, those debts
amounted to €99 billion.
A Greek exit would
not damage the accounts that its citizens have set up in other eurozone
countries – let alone cause Greeks to lose the assets they have
purchased with those accounts. But it would leave those countries’
central banks stuck with euro-denominated TARGET claims vis-à-vis
Greece’s central bank, which would have assets denominated only in a
restored drachma. Given the new currency’s inevitable devaluation,
together with the fact that the Greek government does not have to
backstop its central bank’s debt, a default depriving the other central
banks of their claims would be all but certain.
not damage the accounts that its citizens have set up in other eurozone
countries – let alone cause Greeks to lose the assets they have
purchased with those accounts. But it would leave those countries’
central banks stuck with euro-denominated TARGET claims vis-à-vis
Greece’s central bank, which would have assets denominated only in a
restored drachma. Given the new currency’s inevitable devaluation,
together with the fact that the Greek government does not have to
backstop its central bank’s debt, a default depriving the other central
banks of their claims would be all but certain.
A similar situation
arises when Greek citizens withdraw cash from their accounts and hoard
it in suitcases or take it abroad. If Greece abandoned the euro, a
substantial share of these funds – which totaled €43 billion at the end
of April – would flow into the rest of the eurozone, both to purchase
goods and assets and to pay off debts, resulting in a net loss for the
monetary union’s remaining members.
arises when Greek citizens withdraw cash from their accounts and hoard
it in suitcases or take it abroad. If Greece abandoned the euro, a
substantial share of these funds – which totaled €43 billion at the end
of April – would flow into the rest of the eurozone, both to purchase
goods and assets and to pay off debts, resulting in a net loss for the
monetary union’s remaining members.
All of this
strengthens the Greek government’s negotiating position considerably.
Small wonder, then, that Varoufakis and Tsipras are playing for time,
refusing to submit a list of meaningful reform proposals.
strengthens the Greek government’s negotiating position considerably.
Small wonder, then, that Varoufakis and Tsipras are playing for time,
refusing to submit a list of meaningful reform proposals.
The ECB bears
considerable responsibility for this situation. By failing to produce
the two-thirds majority in the ECB Council needed to limit the Greek
central bank’s self-serving strategy, it has allowed the creation of
more than €80 billion in emergency liquidity, which exceeds the Greek
central bank’s €41 billion in recoverable assets. With Greece’s banks
guaranteed the needed funds, the government has been spared from having
to introduce capital controls.
considerable responsibility for this situation. By failing to produce
the two-thirds majority in the ECB Council needed to limit the Greek
central bank’s self-serving strategy, it has allowed the creation of
more than €80 billion in emergency liquidity, which exceeds the Greek
central bank’s €41 billion in recoverable assets. With Greece’s banks
guaranteed the needed funds, the government has been spared from having
to introduce capital controls.
Rumor has it that the
ECB is poised to adjust its approach – and soon. It knows that its
argument that the ELA loans are collateralized is wearing thin, given
that, in many cases, the collateral has a rating below BBB-, thus
falling short of investment grade.
ECB is poised to adjust its approach – and soon. It knows that its
argument that the ELA loans are collateralized is wearing thin, given
that, in many cases, the collateral has a rating below BBB-, thus
falling short of investment grade.
If the ECB finally
acknowledges that this will not do, and removes Greece’s liquidity
safety net, the Greek government would be forced to start negotiating
seriously, because waiting would no longer do it any good. But, with the
stock of money sent abroad and held in cash having already ballooned to
79% of GDP, its position would remain very strong.
acknowledges that this will not do, and removes Greece’s liquidity
safety net, the Greek government would be forced to start negotiating
seriously, because waiting would no longer do it any good. But, with the
stock of money sent abroad and held in cash having already ballooned to
79% of GDP, its position would remain very strong.
In other words,
thanks largely to the ECB, the Greek government would be able to secure a
far more favorable outcome – including increased financial assistance
and reduced reform requirements – than it could have gained at any point
in the past. And if Greece exits, a large share of the acquired
resources measured by the TARGET balances and the cash that has been
printed would turn into an endowment gift for an independent future.
thanks largely to the ECB, the Greek government would be able to secure a
far more favorable outcome – including increased financial assistance
and reduced reform requirements – than it could have gained at any point
in the past. And if Greece exits, a large share of the acquired
resources measured by the TARGET balances and the cash that has been
printed would turn into an endowment gift for an independent future.
Many people in Europe seem to believe that Varoufakis, an experienced game theorist but a political neophyte, does not know how to play the cards that Greece has been dealt. They should think again – before Greece walks away with the pot.
