Greece has the strongest hand

On Thursday the Greek finance minister tweeted out an opinion piece. It’s quite a brave move from a political figure, and an interesting one.

If this was a game of poker, I’d definitely want Greece’s hand right now as opposed to any other European Country or the ECB.

My whole opinion of the Greek saga hasn’t changed since day one, and that is that Greece will be given some leeway on its debt burden as the consequences otherwise are more severe.

There has been a lot of very poor analysis linking this to Game Theory (from a lot of people who have no understanding of what Game Theory is). So here is my take.

I am firmly of the belief that if you sign up to terms, those need to be fulfilled. This is the approach Germany, along with support from Belgium, Finland, Spain and Portugal are taking (and a few at the ECB).

I completely get their viewpoint, and if you start making exceptions then this could set a precedent. After all, if Greece get to renegotiate then why won’t Spain or any others? Essentially they all had to take their share of the pain and if one doesn’t align you jeopardise the bigger picture.

I totally agree with this standpoint but there is a bigger challenge here.

If you hold this principle, you end up costing the Eurozone a lot more. The fall out for pushing Greece out of the Eurozone is not only to punish Greece, but also to punish the whole Euro area. For a start, you would likely have to write off all Greek debt.

In this case, you really need to look at the consequences of each move. If I had to liken it to a trivial game, it would be poker.

And despite Germany having very strong cards at this moment in time, Greece has a small stack of chips and a very good hand. In other words, it has nothing to lose by going all in.

If you play the total outcomes you end up with the mathematical conclusion that they need to find a good compromise after extending the current debt deal. I also suspect for the greater good you end up renegotiating part of the Spanish debt.

All of this obviously won’t sit well in Germany, and I would suspect out of this comes the higher probability that the solution is that Germany leaves the Eurozone (although would they really give up on it given how much benefit they have already derived and can derive in the future given their extremely strong export function?).

This is where it gets murky, as unfortunately it does become a heavily political game that is media-fueled. At the moment, political leaders are preferring to draw dividing lines than actually knock down boundaries for a solution. This tactic typically favours the group who can play an emotional context (damn humans and their emotions) or who have a nothing-to-lose play.

The outcome for Greece, if they do pull out of the Eurozone, isn’t really that much worse than what they have at the moment – except with their own heavily devalued currency they will at least likely become a super cheap place to holiday and tourism can pick up again, which is such a large part of their economy.

The outcome for the rest is much worse.

It’s why I think poker is a slightly better analogy (bar the fact that it is unlikely any sort of winner comes out of this).

Consider this:

You are at a James Bond Casino Royal-style poker table. Chip leader USA is in the corner, UK has a medium-sized stack still hanging on, Japan has a smaller stack but is a genius. Then there are a few other smaller players in the game in terms of Canada and Australia.

All of these have folded so far but you, representing a collective group called the Eurozone/Euro Group, are up against Greece. You are fighting the USA in a pretty straight fight for the title and the spoils of reserve currency, including the trade benefits it has. Meanwhile Greece is short-stacked and just went All In; meaning you’d lose any foot hold you had in the game if you lost this round. You have a pair of jacks but an ace has been drawn on the flop. Do you risk going all in, wiping Greece from the game?

Ok, so it’s a tenuous example in reality. But here’s how it plays out.

If you’re a mathematician, you cut your losses and play the next hand. A novice? Go all in without knowing the consequences. While the political geniuses will look for the tell.

And if you’re a trader? Well, you should know better than to get involved with politics. Remember only to follow the flow and protect yourself. Then you will do well no matter how this plays out…