Market View: What’s Syriza playing at?

Market View: What’s Syriza playing at?

Thanks to the Greek finance minister’s background as an academic of game theory, everyone is trying to figure out what game the Greek governing party, Syriza, is trying to play.

As it looks like Greece is hurtling headlong towards disaster, the most commonly used example is the game of chicken, where two drivers race towards a cliff and the loser is the one who swerves away first.

Unfortunately, the game of chicken all too often ends with both drivers plunging over the cliff to their doom.

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At first this sounds like a great analogy, but there is a big problem with it.

While Greece would end up in intensive care if it goes over the cliff, the rest of the eurozone would probably just come out feeling bruised. The market clearly thinks so: while spreads on Greek government bonds have risen, those on other periphery countries moved only marginally.

If the risks are so unbalanced, why is Syriza playing such a risky game? One reason is that Syriza is not only interested in the other driver, but is also paying a lot of attention to the spectators.

Syriza had promised Greek voters they could both keep Greece in the eurozone, and rollback the austerity and reform measures while reducing Greece’s level of debt.

Unfortunately for Syriza this dual mandate is turning out to be mutually exclusive. Yet a failure to achieve either of these objectives could lead to a political crisis and even cause the government to fall.

The best survival strategy for Syriza is thus to wait until the last minute to swerve. Swerving too early would be seen as failure, but by swerving only at the last minute the party can blame the rest of the eurozone for being too uncompromising. And there is always the hope that the eurozone capitulates and swerves first.

But most important are the internal politics. Even if prime minister Alexis Tsipras strikes a deal with other eurozone leaders, which looked increasingly likely when I wrote this last week, he will need to put its terms through the Greek parliament. And this means getting it past the far left wing of the Syriza party.

This wing has taken a much harder stance against the eurozone, and would likely have been after Mr Tsipras’ blood if he had struck a compromise deal too early.

For Mr Tsipras to strike a deal and still survive politically, he needs to do it at the last minute.

In short, the prime minister needs to do what he has just successfully done: bring about a ‘take-it-or-leave-it’ ultimatum from the eurozone.

That way, he can present the deal as the best he can get, and he can effectively turn the parliamentary vote on the deal into a referendum on continued membership of the eurozone.

To vote against the deal, the left wing of Syrzia would effectively be voting to leave the single currency, something the Greek public does not won’t; they still strongly support continued membership of the euro.