In Greek Debt Puzzle, the Game Theorists Have It | Hacker News Reader

In Greek Debt Puzzle, the Game Theorists Have It

nytimes.com

69 pointsLuc50 comments

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.

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.

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.

Rents tend to be inflation adjusted. Mine adjusts automatically every year based on the inflation figures. So while your pension remains the same, your rent will jump and you suddenly cannot afford it. The end result is the same: You'll have to negotiate with your landlord (cut the price vs. skip the inflation adjustment).

There's a clause in most contracts to adjust rents based on inflation here, but not many landlords require it, because salaries haven't tended to rise along with inflation.

Landlords not reducing the rent when pensions get cut are equivalent to landlords increasing the rent when the pensions stay the same.

In other words: I see no problem.

It's equivalent to every landlord in the country simultaneously raising rent by the same amount. Would you happen to be American, by any chance?

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.

>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.

Governments everywhere tend not to do this, so it becomes impossible to sort out a rational picture of the economy when economics is inevitably highly politicised.

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

This will happen if Greece leaves the Euro. I don't doubt plans are in place.

But the underlying problem is that Germany and the IMF are simply loan sharking. And you can't loan shark in the Eurozone, because if you call in a debt too aggressively the whole project falls apart, with potential to seriously damage the Euro area economy, and possibly unwind the entire world economy too.

The only justifications for austerity are political - specifically to put the Greek government and the people who voted for it in their place, and to show them how little political power they have.

Austerity is not an economic solution. There is no possible way imposing austerity can make debt repayment more likely. Even the IMF has accepted this.

Austerity is simply a punishment for taking a loan from someone who's now trying to do the state-player equivalent of breaking a debtor's limbs because they're trying to pay late. "Reform" is econo-Kremlin code for "We don't like it when public money is spent for the benefit of the public."

So this is purely about face now, not facts or futures.

The real question from a game theory point of view is how much damage a Grexit would do. Some people in the game realise that it has the potential to spread and become a major market meltdown.

Tsipras and Varoufakis are certainly aware of this, and are playing accordingly.

It's not obvious how well the other negotiators understand this.

On austerity..

I think you are overstating the point about justifications for austerity.

The Greek government's finances were such that they consistently spent more than they took in, that is ho the debt accrued. Austerity/reform got it to the point where it spends what it takes in, without enough left to pay back loans. I doubt that it would have been politically realistic for Greek to do this without EU forcing them (and taking the blame).

This is a terrible thing even if it had ended here. Improving efficiency in this environment is nearly impossible, unless "inefficiency" means big chunks of fraud and theft. So, reform means reducing services, and creating unemployment. Say you have 10 firemen. You can fire 5, halving the firefighting you can do. 5 become unemployed, but unemployment costs are less than fireman salaries so you save the difference.

There is a political catch 22. These reforms are not too bad if done during economic good times, but they are politically impossible without some sort of unbearable pressure like insolvency (IE, can't pay salaries this month).

Any government can consistently spend more then they take in. Provided your GDP grows equal to or faster then then expenditures, you can do this indefinitely.

Individuals can and do this all the time too - that's what moving into the bigger apartment when you get a raise at work is all about.

That is the line of thinking which got Greece into this mess in the first place. Running a deficit on the expectation of ever increasing GDP works great until it doesn't, then you're fucked.

>Governments everywhere tend not to do this

If you believe this I think youre going to be in for a big surprise when the baby boomers retire en masse. Chicago is probably going to go bankrupt in the next year or so because of overpromised pensions. Other cities are going to have issues.

> "Reform" is econo-Kremlin code for "We don't like it when public money is spent for the benefit of the public."

In 'Boomerang' a statistic is given that the public trains are so expensive that it would be cheaper to pay to have everyone that uses them go by taxi.

So I don't think Greece is exactly an innocent being bullied by 'econo-Kremlin' tactics whatever that means.

Governments everywhere tend not to do this

I agree, but tendency is not inevitability. Some countries (eg Australia and to an extent the US) have decent systems where instead of promise-pensions you have an actual bank account, with some amount of personal control. This specific is solvable, though moving from one system to another is very hard.

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.

The Greek people just elected an "extreme" government because they were unwilling to suffer deprivation to repay an unmanageable debt-load.

Your solution appears to ask them to do exactly that but structured slightly differently? Reducing pensions and public sector pay can be done by changing the payouts denominated in euros just as easily. I doubt the electorate would fail to notice, and make their views known.

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.

---

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

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.

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

Greece is 2% of the EU economy ...

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.

..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.

In 2014, Germany's exports to Greece grossed ~5 billion Euro [1] which is less than 0.5% of Germany's total exports.

[1] https://de.wikipedia.org/wiki/Wirtschaft_Deutschlands (for the lack of a better source)

I stand corrected.

*edit, does this include interest payments?

> 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.

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...

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.

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".

> 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.

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.

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.

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-...)

Outstanding Greek debt is irrelevant. They could default tomorrow and get rid of it all.

There problem is they need to borrow more money tomorrow, because their budget is not balanced even if you ignore the debt. And if they default the money truck keeping their country afloat stops showing up.

Do you have any numbers to back up your claim? Please supply links w/ numbers if possible.

http://www.wsj.com/articles/greece-expects-primary-budget-su... http://finance.yahoo.com/news/greece-says-eu-imf-lenders-095...

Greece hasn't had a balanced budget in decades, and creditors don't believe that 2015 will be any different. If they can manage to actually not run a deficit in 2015, that would be a great boon for them.

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.

Iceland's situation was nothing like Greece's. Iceland's government defied international pressure to nationalize the debts of its three big, private banks. The banks defaulted, but there was no sovereign default.

The creditors from UK and Netherlands were really pissed off and still are. So mainstream is rewriting the history now?

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

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.

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).

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.

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

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.

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...

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)

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.

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.

"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

Reply on news.ycombinator.com