“They think our love is just a growing pain
Don’t they understand it’s just a crying shame
Their lips are lying only real is real
We got to find out right now we gotta be what we feel”
Greece is the word
Writing a blog on financially related topics has been relatively easy over the last five years as most months would bring a fresh political blow up, potential pandemic, invasion, geopolitical terrorist threat or asset class boom/meltdown.
This year has been different, we started with issues (Greece, interest rate rises in the U.S., oil in flux) and they are still front and centre six months on which makes writing anything fresh a bit more challenging.
Whilst the expectation was the process of resolution would involve prolonged political posturing and that both the Greeks and the EU (especially Germany) would need to take it to the brink before their electorates would accept a compromise to diametrically opposing views, it’s now getting perilously close to that edge.
The Greece finance minister Varoufakkis, he of the Goth leather coat and Paris Match photo shoots is, apart from being an apparent narcissist, a renowned expert in game theory.
Game Theory is the study of the actions and resultant reactions in a conflict, based on the various stimuli in play such as vested interests, desires, capacity to endure and the hopes and fears of the competing players (in essence the scholastic and algorhythmic quantification of the writings of Sun Tzu’s “The Art of War”).
“All men see the tactics of how I conquer.
But what none see are the tactics out of which victory is evolved”
A skilled player who understands game theory should (in theory) be able to identify and exploit their strengths and the opponent’s weaknesses to achieve the optimal outcome.
In the case of the Greeks they have plainly been working on the assumption that the EU wouldn’t ultimately hold the line on the fiscal changes required to allow more bailout cash (lower pensions, cutting state aid, reducing deficits etc) if this would mean Greece leaving the EU.
So the Greeks have kept saying no to the demands.
The EU (really Germany) have so far held firm; no reforms, no more money.
Now this was all pretty predictable and fairly mundane until last week when it really started to kick into a higher gear (we are in the end game now because there is a hard deadline for repayment of debts, which if missed will trigger a default and once that happens all bets are off).
The first real shot in anger was from an unnamed source in the EU, who was quoted as saying, ‘if an agreement is not reached over the weekend the Greek banks would probably not open on Monday’. Now that’s a really big deal and such a thing should never be said.
If capital controls come in for Greek banks because the wave of people withdrawing money becomes a tsunami (and that’s partly psychological, runs on banks are killers irrespective of whether there’s a real problem or not as no bank ever has enough cash to pay back depositors if they all want it back at once) then it hits tourism and commerce and is highly damaging to an economy already in the dumper.
So in effect saying it could happen is pretty much the same as causing it to actually happen. This was therefore a serious escalation in hostilities.
So what happened then?
Two days later the Greek prime minister has a very public meeting with Russian President Putin to discuss “economic joint ventures”.
Why was this their big move?
Because the balance of what Europe fears most has shifted from the last Greek blow up in 2012. At that time the main worry was the contagion of bank failures if Greece defaulted on its sovereign debt held by Euro banks. As a safeguard much of those debts have since been reallocated away from banks and into the ECB and EU States. The threat of a Euro Lehman’s style domino effect systemic failure has now in large part been neutered, it’s not the same potent weapon for the Greeks anymore.
So if you are Varoufakkis the question was, what does Europe most fear now and what have events post 2012 made ever more concerning?
The obvious answer was and is Russia.
Greece lies at the edge of where West meets East; it borders Turkey, Syria, Israel, Bulgaria, Macedonia, Lebanon and Tunisia.
The Americans for one would be horrified to see Greece become a strategic partner to Russia, and the Europeans would (from a geopolitical stand point be absolutely) mad to allow this having just seen the annexation of parts of Ukraine.
So this is big boy game theory in full swing; the Greeks have played their new ace card, a potential tie up with Russia. Implicit in their actions is the threat, if the EU doesn’t give them what they want, that’s who they’ll partner with and as the government is ultra-left wing it strengthens their hand further, it’s believable as they are ideologically compatible.
Yes, if the EU does cave to Greece and give them a pass on their debt it will be an embarrassing climb down and will likely cause other EU nations to try for similar relief but the cost financially is relatively small, especially when set against a Greek alliance with Russia.
Furthermore here’s the rub, although Ireland or Spain would be arguably far more deserving of assistance because of their genuine efforts at reform, neither border Turkey, Syria, Israel and Lebanon and won’t threaten an alliance with Putin.
So they don’t have the leverage and it won’t need to happen.
Winning is seldom a factor of fairness, mostly it’s decided by how far both sides are willing go or what either side will or won’t do.
It’s why as an example a Western military invasion of a foreign country is unsustainable long term even if its forces are far superior.
An Afghan rebel leader explained.
“We will fight for ever, they will not
We don’t fear death
One day they will have had enough
We win by waiting”
So the Greeks have a potent weapon that game theory certainly suggests Europe won’t want deployed.
To quote Sun Tzu again.
“The supreme art of war is to subdue the enemy without fighting”
In other words.
If they believe a conflict will result in unacceptable pain then they’ll surrender without fighting, so identify and threaten the pain they most fear.
And u win!
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.