by Bill O’Grady
On Sunday, July 5th, Greeks voted in a special referendum to decide whether to accept the troika’s most recent proposal to end the current debt and financial crisis. Voters in Greece overwhelmingly rejected the EU’s offer. Since the vote, EU and Greek officials have been meeting, trying to determine the path forward. As of this morning, Greek PM Tsipras agreed to rather harsh measures to begin the bailout process. However, nothing has been finalized yet.
In this report, we will update our views on the Greek situation, using game theory as a theoretical construct. We used a similar construct in an earlier report on Greece but, in light of the referendum and subsequent negotiations, we believe that further clarification is necessary. And so, in this report, we will review the “game of chicken,” which we believe best describes this situation. After this description, we will discuss in detail the particular aspects of this game and why it leads to rash and aggressive behaviors in participants. In the aftermath of the referendum, we will review the choices available to the troika and offer our expectations on the outcome, with the caveat that games of chicken do not necessarily lead to easily predictable outcomes. As always, we will conclude with market ramifications.