Greek Debt Crisis

What’s the deal with Greece?

In the aftermath of the financial crisis of 2007-08, Greece announced in 2009 that it had been understating its deficit figures for years in order to meet European Union requirements. By the spring of 2010, the country was headed toward bankruptcy. The Troika (the International Monetary Fund, the European Central Bank, and the European Commission) issued the first international bailout for Greece in 2010, and another in 2012. The bailouts required implementation of harsh austerity measures, including budget cuts and steep tax increases. In the summer of 2015, Greek banks were facing a liquidity crisis and the country was in danger of sovereign default. The Greek government either had to negotiate terms of another bailout, or default and potentially exit the Eurozone. The proposed plan for the bailout was contentious because the Greek people were not happy with the reforms demanded by the Eurozone. I will be focusing on this point in the Greek debt crisis. I will tell you the outcome of this standoff now so there’s no suspense. On July 13, 2015, Eurozone leaders reached a provisional agreement on a third bailout program. (Comment below if you don't understand any of the econ terms)

Fun Fact: Greece was ranked the most corrupt country in the EU during the time of this crisis

The decision Greece and the rest of the Eurozone faced in this crisis can be analyzed from a game theoretic perspective. This perspective could be key considering Yanis Varoufakis, the Greek finance minister, spent his academic career studying game theory and co-authored a textbook on the subject. Was Varoufakis using game theory to decide the fate of Greece? He denies it, but I say yeah duh.

This is literally Yanis showing up for the debt talks.

Decision-Trees and Payoffs

Players: Greece vs. the Eurozone

(1,0) would be a good payoff for Greece and a bad payoff for the Eurozone

http://www.bbc.com/news/magazine-33254857

Let’s look at the scenario where Greece puts a plan on the table. Greece negotiates that they will implement new taxes and make changes to pensions in exchange for avoiding spending cuts and having some of its debts written off. If this plan is accepted by the rest of the Eurozone, then Greece is content. Let's give its payoff a score of 1.

If the Eurozone accepted this deal, the monetary union would remain intact, but it would have to ease its strict rules on fiscal policy and take a loss on holdings of Greek debt. Let's give the Eurozone payoff a score of ¾. So the overall payoff is (1, ¾).

http://www.bbc.com/news/magazine-33254857

If the Eurozone rejected the deal, Greece would be unable to pay its creditors on time, and would be in default. There are two possibilities from here.

1. "Grexit" - Greece leaves the Eurozone but the other members live happily ever after. 
2. Grexit leads to the collapse of the Eurozone.

The first scenario is likely to be pretty bad for Greece but not for the Eurozone, so we’ll make that a payoff of (0,1). The second is bad for everyone, so the payoff is (0,0).

However, the two possibilities are equally likely, so the expected payoffs look pretty bad for both players.

http://www.bbc.com/news/magazine-33254857

So, we can see that the equilibrium strategy is for the Eurozone to accept Greece's proposed bailout plan. (Which is what happened)

Here's something to consider: If the Eurozone offered a counter plan which Greece accepted, would that also be an equilibrium strategy? Greece would probably have to accept more reforms which would make them less happy, but the Eurozone more happy.

We can also consider the concept of allocentrism, which requires parties to assess the others’ interests in order to understand their bargaining position. (It’s the opposite of egocentrism.) In order to know how far they can push Greece, the Eurozone needs to understand the interests and objectives of the Greek government. Additionally, Greece needs to come up with a solution that works for the hardliners (Germany) of the Eurozone. Similarly in prisoner's dilemma, each prisoner needs to consider the objectives and motivations of the other before making their own decision. 

What about these "outside factors"?  The author of the article I read called this "nature." Applying game theory to a real life scenario can only go so far. Things like human emotion and nationalism play a role that is hard to represent in a tree graph.

What about the fact that Greece and the Eurozone are in communication, unlike in prisoners' dilemma where each prisoner is isolated? Let's consider the "strategies" the Eurozone could use. If the Eurozone doesn’t believe Greece’s threat to default, they might see their optimal strategy as remaining firm in their demands for Greek fiscal austerity. But, if the Eurozone believes Greece motivated to reject further austerity, it could cave to Greek demands for leniency. The due dates of Greece's loan payments act as a deadline for the decision. If the date comes and no bailout deal has been reached, then Greece defaults. So do you think the fact that Greece and the Eurozone are in communication makes the scenario different than prisoners' dilemma?

News outlets have been reporting that Greece is edging closer to a repeat of the 2015 drama that pushed the nation to the edge of economic collapse. Sounds like they need game theory refresher. 

Overall, by assigning payoffs and probabilities to the outcomes of a situation you are faced with, could you use game theory to find the best outcome for both parties involved?

Works Cited

BBC. 2015. Can game theory explain the Greek debt crisis? June 26. Accessed 2017. http://www.bbc.com/news/magazine-33254857.

Ranasinghe, Dhara. 2015. Did Greece score an own-goal with game theory? July 7. Accessed 2017. http://www.cnbc.com/2015/07/07/did-greece-score-an-own-goal-with-game-theory.html.

Stewart, James B. 2015. In Greek Debt Puzzle, the Game Theorists Have It. June 4. Accessed 2017. https://www.nytimes.com/2015/06/05/business/in-greek-debt-puzzle-the-game-theorists-have-it.html?_r=1.

Thangavelu, Poonkulali. 2015. Game Theory And The Greece Bank Crisis. July 14. Accessed 2017. http://www.investopedia.com/articles/investing/071415/game-theory-and-greece-bank-crisis.asp.

Wikipedia. n.d. Greek government-debt crisis. Accessed 2017. https://en.wikipedia.org/wiki/Greek_government-debt_crisis.