It is not a game…

We are loathe to add to the column-miles (sic!) that must, by now, have been expended on the long-running Greek default and “Grexit” drama, but we have watched the endless posturing and theorizing of the “experts” with something akin to fascinated bemusement.

Much has been written about how “game theory” must be playing a significant role in the negotiating positions of the various parties, especially given that Yanis Varoufakis, the Greek Finance Minister is a co-author a book entitled “Game Theory: A Critical Introduction” (first published in 1995!) and bearing in mind his wry, alleged recent comment lamenting “the absence of a skilled game theorist on [the other] side”.

However, what strikes us most about much of the debate is that it is conducted at a level and in a manner that tends to ignore the fact that there is a population of some 11 million who are largely pawns in a contest of high- (or more probably, low-) politics and who have experienced real hardship over the past few years, because of the EU’s (and, in particular, Germany’) obsessive focus on “austerity”. Of course, we understand that those in Cyprus, Ireland, Portugal and Spain, who have had similar experiences, would look askance at what would be portrayed as yet more forbearance for those who supposedly have nobody to blame but themselves.

And yet…

The idea that the Greek economy can have further burdens imposed on it in terms of retrenchment and a requirement to run significant primary surpluses, is a bureaucrat’s fantasy, given the carnage that has already resulted in terms of output and unemployment levels over the past 5 years or so. Of course, structural reforms are essential; and corruption and rampant clientelism must somehow be rooted out, but the current government has no electoral mandate for much of what the EU and its co-creditors are trying to impose; which makes it somewhat difficult to expect compliance, even if reforms are agreed upon at governmental level, because to be seen to do the political bidding of the infamous “troika” (IMF, ECB and European Commission) would be “political suicide” for the governing Syriza party; and few politicians, let alone those who show little sign of pragmatism, have the courage to act against their own perceived interests.

Matters appear to be coming quickly to a head, because June 30th is the expiry date of the current “bail out”; and on that date Greece also has to make significant payments to the IMF, with a clear risk that it cannot or will not do so, because it will not have the available cash or access to liquidity. It is already struggling to meet its domestic “functional” obligations such as payrolls, services and pensions.

And the Bank of Greece itself has now raised, for the first time, explicitly the possibility not only of default and “Grexit” (from the Eurozone), but even from the European Union itself. That the relevant sovereign’s central bank should believe that it has to issue such a warning should give all those involved pause for thought, because it presages a disorderly collapse of the Greek banking system (which is haemorrhaging deposits) ; the withdrawal of ECB support; the likely imposition of capital controls; and the potential introduction of a domestic “scrip” to replace the Euro.

Consideration should also be given to the fact that, although Greece is a “rounding error” in economic terms, it has geopolitical significance on the eastern marches of Europe and is embedded within the inherently unstable Balkan region. The risk of such a country becoming de-stabilized, ungovernable and potentially a failed state (as a tail risk), especially if still part of the EU (as absurd as that might now seem), should concentrate minds on finding some form of compromise that avoids a disorderly default.

At Awbury, we spend significant resources on ensuring that we can underwrite, execute on and manage economic and financial catastrophe risks (E-CAT). It is fundamental to our business model; and a core competence – and most certainly not a game! So, we monitor carefully the geopolitical environment, because it is essential to be informed and “ahead of events” and their consequences.

The Awbury Team

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