The Greek crisis explained, in pictures

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Between 2007 and 2012 several Eurozone countries — Portugal, Ireland, Greece, Spain — needed bailouts. In each case, the recipient countries threatened that they would leave the Eurozone if the bailout terms were too harsh. Germany and the other AAA-rated European countries countered with threats to withhold the bailouts if the recipients did not agree to austerity and economic reforms as part of the bailout terms. The threats were treated by financial markets as credible (the price of gold, for instance, soared, as each bailout deadline approached). Hence both sides gained leverage and the bailout packages, though harsh, conformed to the desires of the recipients. This was a classic game of chicken, illustrated here with tractors in honor of the American movie Footloose.

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In 2013, Cyprus attempted the same strategy. Eurozone financial markets did not react. Probably, Cyprus was seen as small enough that if it exited the Euro there would be little impact on other Eurozone economies. As a result, Cyprus had no leverage. The brinkmanship strategy was a failure. The terms of the bailout Cyprus received were exceptionally harsh – much harsher than those currently offered to the Greeks. Money was taken from Cypriot bank accounts to pay for the bailout, for instance. Cyprus accepted the bailout nonetheless. This was the last time a Eurozone member employed a brinkmanship strategy…

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…until 2015. Greece, under a Syriza-led government, made another attempt. Rather than threatening to leave the Euro, though, they threatened to default on debts from prior bailouts. The financial markets once again did not react, even as negotiations went to the brink and Greece defaulted on IMF debt. Greek negotiators tried everything, including good-cop-bad-cop and pretending to be crazy. Probably, the fact that Cyprus had accepted a much worse bailout package (after much bluffing) caused markets to believe the Greek government was also bluffing.

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The Greek government called a referendum, thus directly involving the Greek public in the confrontation. Presumably, the Greek public is more credibly threatening: might they genuinely vote for Grexit if the bailout package is too harsh? The intentions of the Greek public are certainly harder to read. Presumably, Greece will therefore get a somewhat better deal (after much bluffing on both sides). However, the reaction in broader Eurozone financial markets has continued to be surprisingly muted, so Greece is unlikely to get a great deal.

It’s also possible that, foreseeing the possibility of future games of brinkmanship (both with Greece and other countries), the AAA-rated European countries will decide Grexit is the lowest-cost option. Or that the Greek public will do something genuinely crazy rather than pretending to be crazy.

That said, as previous rounds of Eurozone bailout negotiations (and the various conflicts over raising the U.S. debt ceiling) have illustrated, in games of brinksmanship both sides will endeavour to bluff credibly up to the last possible moment, while neither side actually intends to crash.