The outcomes of the Euro crisis has been modelled extensively using Game Theory
Game theoretic models are appropriate in this context compared to typical statistical/econometric stuff that depends too much on data.
Political economy can be modelled very nicely using game theory and the euro crisis is a political one.
What's more interesting are the new Behavioural Models BUT all these game theoretic models don't work that well with data
Therefore, not that popular with traders, banks, macroeconomists etc.
Beyonnd this point, no one has stuck their neck to predict what will happen.
Actually, quite a few of the usual suspects have stuck their necks out and predicted the end of civilisation type scenarios
It's a great time to stick your neck out because:
1. The media is hungry for any predictions, the more ugly the better!
2. You can't really lose because if things work out, you can say that your dire predictions scared people into the right course of action
3. If things go belly up, then you look like Moses Parting the Red Sea (the book deals and invites to lectures etc. will follow)
4. In the economic pundit game, you only need to be spectacularly right ONCE, even if you're dead wrong the rest of the time
It cannot get along with a bankrupt Europe and a euro which is worthless.
It's pretty hard to bankrupt Europe when you look at the aggregate resources available. At worse, we're talking about a temp period of deleveraging ie. restructuring. There are 2 really awful consequences to follow this event:
1. The swift contagion that will sweep across the world with financial markets as a conduit
2. The possible decade plus depression to follow as deleveraging works it's way through the system (that's what the USA is facing now & what Asia faced in the 1990s)
The euro won't be worthless because the euro is really a Deutsche Mark in disguise
I'm old enough to actually remember trading Deutsche Marks
The forecast that the G8 will hands off and preserve the IMF at the expennse of Europe is not a mainstream view.
Actually preserving the IMF is not even an issue. The Fund will be pretty helpless if it ever came to that kind of scenario. It won't go bust, just won't be able to do much. So, everyone knows that the G8 can't be hands off. That's why the Europeans are so busy trying to share the problem! These guys all studied Game Theory too.
The real worry is that we all sit around playing game theory and the shit hits the fan all of a sudden ie. A Lehman type incident. The nightmare is an unprepared Europe (slow to act) as opposed to a stubborn Europe (refusing to act). Markets can handle bad (even terrible) news ie. the mkt will adjust risk vs return accordingly. The nightmare occurs when mkts face severe uncertainty (like the Lehman crisis), when everything stalls because there is no plan and nobody dares to trust anyone.
At the heart of it is new survey data which shows that austerity is deeply unpopular.
History is going judge these right wing nutcases that pass for macroeconomists very harshly
Austerity is the most idiotic approach in a situation like this
How can the European politicans act if there is no public support?
1. Drop the dumb austerity act and give people one less thing to bitch about
2. Have the courage (difficult for politicians) to explain the honest truth to their electorate. There are enough rational voters out there
3. Cheat! There are ways around the treaty conditions that's stalling action right now. Even the IMF can be a convenient vehicle for a European funded bailout which doesn't look so outwardly European in origination
4. Note that rampant cheating was common when it came to setting up the euro in the 1st place
Putting it together, there is good empirical evidence to suggest that the risk is probably understated at the moment
This kind of risk is unmeasurable
That's why Quant models have been a disaster for hedge funds and banks trading euro markets
my guess is that the Europeans are going to make their problem the world's problem.
They are trying but the world also studied game theory, so the europeans won't succeed
That's why the Germans are slowly edging towards the right mindset
The IMF has been selected as the vehicle to solve the prolblem. Due to the unprecedented nature of the crisis, the IMF will be forced to make unprecedented concessions. We will therfore probably not be getting that US$ 4 billion back anytime soon. Instead we will debating how much more we need to contribute to save Europe.
The IMF is pretty useless by itself (in this context). The combined debt servicing requirements of Spain and Italy alone dwarf the Fund's asset base. The IMF won't be allowed to make concessions because the USA won't/can't allow it (political gridlock in Congress, remember?). So, at best, the IMF can be crisis HQ ie. a rally point for coordinated action (with major European input).
We haven't paid out the 4 billion and my guess is that it won't be called. This war chest is about confidence building and not an actual bail out. The most likely scenario is coordinated European/IMF action (with mostly European resources).
I would also point out that no one selected the IMF as the key lead agency for this crisis. The IMF just likes to butt in and play boss man whenever a macro crisis pops up anywhere. It's how they justify their existence.
Here is should be noted that the probabilty that all will end well is still the more likely of the outcomes. The nightmare family of scenarios in my view is probably in the 25% to 35% range. While still the outside bet, a risk which is uncomfortably high.
The tail risk is a crisis so bad that S'pore loses 100s of billions
and we get another great depression (that lasts longer)
In that event, nobody will remember that paltry 4 billion