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Generational Dynamics Web Log for 10-Apr-2010
10-Apr-10 News -- Rumor of Greece bailout this weekend

Web Log - April, 2010

10-Apr-10 News -- Rumor of Greece bailout this weekend

Violence simmers down in Kyrgyzstan as US and Russia compete for influence

An EU-IMF Greek rescue is rumored for this weekend

Greece continued its downward spiral on Friday, when Fitch Ratings lower the nation's debt rating two notches to near junk status, to BBB- from BBB+. The WSJ quotes fitch as saying, "It is vital that the Greek authorities import credibility from external institutions, underpinned by a credible commitment of financial support." The phrase "import credibility" implies that Greece has no creidibility on its own.

Things have gotten so bad that European Union officials are actually going to have to put together a bailout this weekend -- or at least that's what economists at UBS AG are saying, according to Bloomberg.

Angela Merkel and the Germans have made it clear that they do NOT want to bail out Greece. Merkel has reiterated her position that she will only agree to lend money to Greece at "market rates" -- i.e., the 6-7% interest rates that we've been talking about for a few days, and which everybody agrees that Greece can't afford for long.

It'll be interesting to see what comes out of this over the weekend. One possible scenario is that the weekend will end in bitter recriminations. A second possibility is that the EU will come up with some kind of phony bailout, like the one they came up with two weeks ago that accomplished nothing. And a third possibility is that they'll come out with a real bailout package that will actually convince the financial community that they mean business about not letting Greece default.

In my opinion, the first two scenarios are equally likely, while the third is highly improbable.

A game theory perspective to the Greece financial situation

Mohamed El-Erian, CEO of Pimco, has posted an article in FT explaining, from a game theory perspective, why the Greek rescue plans are failing.

He calls the situation a "classic coordination failure in game theory," where any party that moves is worse off. That is, "it's in the interest of any single party to wait for other to move first. As a result, no meaningful progress is made, the problems fester, and the risks of a disorderly outcome increase."

Zugzwang: Whoever moves loses

Zugzwang: Whoever moves loses

This is a fairly common concept in the game of chess, especially in the end game, where it's called "zugzwang," literally meaning "the compulsion to move." In the position on the right, each King is protecting its own Pawn and attacking the opponent's Pawn. Whoever has to move will lose his Pawn and the game.

One side or the other has to lose because they're opponents. In the Greek situation, according to El-Erian, "the solution to Greece’s problems is undermined by the inability of the major players credibly to commit to the required high level of co-ordination and trust."

Thus, the Greeks can't cut their budget even more than they have, because they know that the EU will delay helping them in that case. And the EU doesn't want to just offer a bailout package, because then the Greeks will stop cutting their budget.

We might add that both the EU and Greece have political "allies" that are pushing them towards distrust and delay. Thus, the Germans are pushing very hard to prevent the EU from provding a bailout, and the labor unions are pushing very hard to prevent the Greeks from agreeing to any more budget cuts.

Thus, according to El-Erian,

"Against this background, we should expect an intensification of the European blame game in the weeks ahead. Greece will complain about the lack of meaningful support from its European neighbours. They, in turn, will point the finger right back, noting the urgent need for Greek austerity. And the IMF will be pulled in all directions, including by those hoping that the institution can engineer an immaculate recovery for Greece."

And so, the EU and Greece are in mutual zugzwang. "As a result, Greece is unable to provide sufficient assurances to its creditors, thereby further complicating an already tough situation. This accentuates the hesitancy of exceptional financiers, such as Germany, who resist having to again pay the bill after others have partied. And without exceptional financing, the Greek government finds it even more difficult to embark on an adjustment program that relies on only one instrument – that of fiscal austerity."

This is a very interesting way of looking at the situation - and not just the Greek financial situation.

It's similar to an article that I posted in 2006 exploring the concept that the world is in a "Nash Equlibrium," a game theory concept named after John Nash, the Nobel-winning mathematician portrayed in the movie "A Beautiful Mind." (See "A beautiful mind? The world is paralyzed into a 'Nash equilibrium.'")

In game theory, a Nash Equilibrium occurs when each player has to make the same move over and over, because the first player to make a different move loses something. This isn't exactly the same as zugzwang, but it has the same effect.

Kyrgyzstan's ousted president Kurmanbek Bakiyev fears he'll be lynched

After the riots early this week, where 76 people died and over 1,500 were injured, Kyrgyzstan's ousted president Kurmanbek Bakiyev has gone into hiding in Jalalabad on the Fergana Valley.

Kyrgyzstan <font size=-2>(Source: CIA Fact Book)</font>

Kyrgyzstan (Source: CIA Fact Book)

Bakiyev has told the BBC that he dare not return to Bishkek, the country's capital. "If I were to turn up in Bishkek, I would be killed. Or even worse, they would throw me into the crowd saying 'this is the man who is responsible for all the bloodshed', and then I would be lynched."

Much of Bishkek was looted or burned in the riots. The violence has now stopped, and it remains to be seen whether it will restart and spiral into a larger war.

According to the Asia Times, the Russians are taking advantage of the coup by negotiating with the new government to close the American air base in Manas, near Bishkek, so that only Russia will have an air base in the country.

Additional Links

Opposition parties in Georgia are threatening to repeat Kyrgyzstan's revolution in Georgia, to replace President Mikheil Saakashvili. Ria Novosti

30 million of Mexico's 84 million cell phones are prepaid, purchases from street vendors, and unregistered. Drug cartels use unregistered cell phones for extortion or to negotiate ransoms. This weekend, under a new law, all 30 million unregistered cell phones may be cut off as a crime-fighting measure. Reuters

Rather than hiring just plain-vanilla computer scientists, technology firms in Silicon Valley are looking for those with experience in statistics, data manipulation, mathematics and machine learning. WSJ

DARPA is building a robot that can travel through the forest and forage for food, allowing it to stay on duty indefinitely. The Energetically Autonomous Tactical Robot (EATR) will be able to grab fuel like sticks and branches, saw them up into bite-size pieces, and feed it to a biomass-powered generator that will burn the food and turn out electricity. Forbes

Iran has unveiled new "third-generation" centrifuges that can enrich uranium six times faster than Iran's previous capability. This could shorten the time it takes to build a nuclear bomb, though Iran insists that it's only for peaceful purposes. BBC

The Obama administration is denying climate aid to countries that opposed the Copenhagen climate accord. Bolivia and Ecuador will be targeted. Guardian

A math primer on sovereign debt. A country with debt exceeding 100% of its GDP can survive if the interest rates are low and if the country's economy is growing rapidly. Neither of those situations is true in Greece today. NY Times

The Massachusetts health insurance market is falling deeper and deeper into financial trouble. FireDogLake

China is on a "treadmill to hell" because of their growing property bubble, according to hedge fund manager James Chanos. "They can’t afford to get off this heroin of property development. It is the only thing keeping the economic growth numbers growing." Bloomberg

It's been two weeks since a South Korean navy warship exploded and sank near North Korean waters, and there's still no official explanation what happened. It appears that a cover-up is going on, and it may well have been a North Korean torpedo, but saying so would start a new Korean War. Asia Times

(Comments: For reader comments, questions and discussion, see the 10-Apr-10 News -- Rumor of Greece bailout this weekend thread of the Generational Dynamics forum. Comments may be posted anonymously.) (10-Apr-2010) Permanent Link
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