Only 75%? Are You Kidding Me?
According to CNBC (take that with a grain of salt), 75% of private sector banks have agreed to the Greek bailout. Many people have heard of the simulation called the Prisoners' Dilemma. For those who haven't, an explanation is here. If you Google "prisoners dilemma," you will find many academic papers describing it, as well as simulations that predict the most favorable outcomes.
The problem with that analysis is that it presumes multiple interactions, where you have the experiment over and over. However, in the case of Greece bailout, this is not necessarily the case.
What Does This Mean?
To agree means taking a haircut, maturity extension, etc of existing Greek debt. If anything, what you probably have is that 25%, who dissented, have not properly marked their Greek debt holdings to market. Acceptance of the Greek bailout will crystallize these losses. The French banks (Soc Gen, BNP) have seen their equity prices decline, and their credit ratings cut as a result of the instability caused due to suspicions that they have too much Greek debt. Who knows if this is true, but it is clear that the banking system has restricted funding to French banks due this suspicion. It is now also clear that the ECB and the Federal Reserve, along with other central banks, have basically turned the faucet to "full on" in order to provide the financial system with dollar liquidity. Also clear: these central banks knew full well that the acceptance rate was much lower than the 90% required for the bailout.
Dissent also implies that these banks believe that their survival is at stake, or that they believe that the ECB et al will cave, and provide the bailout in any case. If the bailout is not granted, then the dissenting banks must believe that they will not survive. Otherwise, they would have agreed to the terms as they were originally set. In short, this is mutually agreed destruction from the Cold War days, because if a bank fails (or 25% of them do), then the systematic risk would be catastrophic. However, each dissenting bank must believe that either a) they will perish anyway, or b) the Troika will bailout Greece in any case.
Variations
The reason that this case is so interesting is that it is difficult to ascertain just who is playing. Let's presume that the 25% represent one side. The question is, just who is on the other? The Troika? The other 75% of the banks? Both at the same time? That is why this situation doesn't exactly fit the Prisoners' Dilemma scenario, but it is instructive because the 25% of banks that dissented may, themselves, not agree on who is the other side of this.
Dear Timmy, Ever Hear of the Glass Houses and Stones Thingy?
One thing that Europeans seems to unilaterally agree upon: Mr Geithner's opinion was not, is not, and won't be welcomed. Now that has implications for the entire system, especially since the US has more than shouldered its share of the burden (failure?) of keeping the system afloat. Untold billions have been lent to the US branches of foreign banks, so in a way, it is peculiar indeed that Mr Geithner is receiving the cold shoulder from the Europeans. Perhaps, there is yet another dimension to this particular instance of the Prisoners' Dilemma, with very nationalistic overtones. Yikes indeed.
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