Italy Exits Before Greece in BofA Game Theory: Cutting Research

Italy and Ireland have more
incentive to quit the euro than Greece, while Germany may have
limited room to prevent departures from the currency union,
according to Bank of America Merrill Lynch.

Using cost-benefit analysis and game theory, BofA Merrill
Lynch foreign exchange strategists David Woo and Athanasios Vamvakidis concluded in a July 10 report that investors “may be
underpricing the voluntary exit of one or more countries” from
the bloc.

“Our analysis produces a few surprising results that even
readers who may disagree with our conclusion are likely to find
interesting,” the strategists wrote.

Italy, the euro area’s third-largest economy, would enjoy a
higher chance of achieving an orderly exit than others and would
stand to benefit from improvements in competitiveness, economic
growth and balance sheets, they said.

While Germany is the nation deemed able to leave the euro
zone most easily, it has the least incentive of any country to
quit because it would face weaker growth, possibly higher
borrowing costs and a negative hit to its balance sheets, the
strategists said. Austria, Finland and Belgium also have little
reason to quit, they said, while Spain has the weakest case for
leaving among economies most directly affected by the crisis.

The analysis is based on a framework which ranks eleven of
the 17 euro-area nations on criteria such as how orderly their
exit from the bloc would be and how it would affect economic
growth, interest rates and balance sheets. Ireland and Italy
received an average ranking of 3.5, while Greece was at 5.3 and
Germany had the highest score at 8.5. The lower the number, the
more there would be to gain from leaving.

Woo and Vamvakidis employ game theory to suggest that while
Germany could “bribe” Italy to remain in the bloc and avoid
the fallout from an exit, its ability to do so is limited.
That’s because Italy has more reasons than Greece to leave so
any compensation could become too expensive for Germany and
Italians may be even more reluctant than the Greeks to accept
the conditions for staying.

“If our inference turns out to be correct, this could have
negative implications for markets in the months ahead,” they
said.

* * *

The scarcity of water means countries that have it enjoy a
trade advantage over those that don’t. That’s the conclusion of
University of Virginia professor Peter Debaere in a paper
published by the Centre for Economic Policy Research.

“Water systematically affects countries’ trade patterns in
a manner consistent with international trade theory,” said
Debaere.

Those with less try to protect their scarce resources by
exporting fewer water-intensive goods. That means those with a
lot of it enjoy a comparative advantage.

Because water is necessary for life, Debaere found prices
are often distorted and regulated by governments. Still, it
contributes less to exports than factors such as labor, so
climate change and changing precipitation patterns may only
cause moderate disturbances to future trade, he said.

* * *

Millions of jobs are being lost in the U.S. and Europe
because countries from China to Switzerland are manipulating
their exchange rates, according to Joseph Gagnon, an economist
the Peterson Institute for International Economics.

By restraining their currencies, governments are distorting
capital flows by about $1.5 trillion a year, Gagnon estimated in
a study this month. That drains demand from economies that allow
exchange rates to float freely.

“In other words, millions more Americans would be employed
if other countries did not manipulate their currencies and
instead achieved sustainable growth through higher domestic
demand,” said Gagnon, a former Federal Reserve economist.

Gagnon identifies Japan, Switzerland, Israel, Singapore,
China and Russia as among the countries massaging currency
values. To force a change, he suggested those countries face
taxes on their purchases of U.S. and euro area financial assets.

* * *

Even as forces such as Europe’s (SXXP) debt crisis and global
monetary easing appear to affect currency values, Marc Chandler
of Brown Brothers Harriman Co. suggests U.S. stock markets may
still hold sway.

Over 30 days, returns on the euro follow those of the
Standard Poor’s 500 Index (SPX) 59 percent of the time, Chandler,
global head of currency strategy at Brown Brothers in New York,
said in a July 10 report.

“The general take away is that despite a number of other
drivers and influences, the correlation between most of the
currencies we looked at and the SP 500 has increased in the
recent period,” he said.

Chandler links the closer correlation to investors shifting
between favoring risk and avoiding it. That explains why the
Australian dollar is among the most correlated currencies with
the SP 500 Index. Its 30-day correlation suggests it tracks
U.S. stocks about 90 percent of the time.

“It’s really risk-off, risk-on with the SP a proxy of
risk,” said Chandler.

* * *

Two-thirds of cash-strapped euro area governments are
falling behind their own projections for cutting budget deficits
in 2012, according to JPMorgan Chase Co.

In a sign the region’s debt crisis may continue to smolder,
JPMorgan’s Malcolm Barr and Raphael Brun-Aguerre in a July 6
report cited skepticism that Italy, Spain, Ireland, Portugal and
Spain can reach their goals, and predict “widespread target
overshoot.”

As a group, the governments are forecasting their budget
deficits will fall an average 2.7 percent of gross domestic
product this year from 2011.

The data suggest Italy will fall short of its goal even as
its fiscal position improves this year, the economists said.
Greece’s primary deficit will narrow while its overall gap
won’t, and Ireland will deliver less this year than in 2011,
they said. Portugal and Spain are running wider imbalances.

* * *

Money matters when it comes to securing success in some
Olympic sports.

A study by Goldman Sachs Group Inc. (GS) (GS) economists found an
increase in gross domestic product per capita tends to boost a
country’s chances of winning Olympic medals in cycling, judo,
rowing and swimming. Weaker income effects apply to archery,
canoeing, sailing and Taekwondo, the economists said in a report
published July 11.

The London Olympics begins July 27 and the U.K. may benefit
from playing host because doing so tends to have a positive
effect on local athletes competing in cycling, gymnastics,
rowing, sailing, swimming and wrestling. The hosts would be
expected to see 1.5 to 3 more medals in each of these sports,
the economists said.

To contact the reporter on this story:
Simon Kennedy in London at
[email protected]

To contact the editor responsible for this story:
Craig Stirling at [email protected]


Can the digital revolution rescue Greece from economic crisis?

Editor’s note: Andrew Keen is a British-American entrepreneur and professional skeptic. He is the author of “The Cult of the Amateur,” and “Digital Vertigo.” This is the latest in a series of commentaries for CNN looking at how internet trends are influencing social culture.

Athens (CNN) — Most people travel to Greece to look at antiquities. But I’ve spent the last few days in Athens sightseeing the country’s digital future. And what I’ve seen is surprisingly encouraging.

The future isn’t hard to excavate in Greece. Indeed, immediately upon arrival at Athens airport, travelers are confronted by spread of slick advertisements for a global bank.

“The future is full of opportunity. Be part of the future,” one of these advertisements advises.

“Age will be no barrier to ambition,” another promises.

Andrew Keen

“Even the smallest business will be multinational,” a third guarantees.

But today, in a Greece wracked by the most serious economic crisis for at least a century, the truth about the country’s economic future is mostly the opposite of these advertisements.

In Greece today, the future is mostly characterized by fear rather than opportunity. The problem is that this small country doesn’t appear to be part of anyone’s “future.” Increasingly peripheral, even to the euro crisis, Greece is in danger of drifting back into its dark 20th century past: back to the self-destructive politics of anti-capitalist violence and ethnic hatred; back perhaps to the drachma, to economic autarky and perhaps even to a financial apocalypse equivalent to the Great Depression.

Euro crisis: In-depth

In Greece, the “smallest businesses” in an economy still dependent mostly on tourism, are about as multinational as the crumbling remains of the Acropolis. In this classic Southern European gerontocracy in which at least 50% of young people are unemployed, age actually mostly represents an impenetrable barrier to ambition.

And yet, amidst all the despair, there is a rebirth going on in Greece. It’s a digital renaissance and it’s being pioneered by a new generation of talented young Internet entrepreneurs who are trying to reinvent not only the Greek economy and society, but also Greece’s role in today’s global economy.

The irony of this nascent Greek digital renaissance is that it probably wouldn’t have happened without the economic crisis. In pre-crisis Greece, most Greeks grew up wanting to be public servants. But now that the old clientist state cannot offer lifetime sinecures for university graduates, young Greeks coming out of university now have little else to do except invest their labor in start-ups.

“There’s no other option,” Tasos Frantzolas, the founder of Soundsnap who splits his time between New York and Athens, told me about this entrepreneurial renaissance in Greece. “People of my generation recognize this.”

John Doxaras, the CEO of Warp.ly who studied physics at Cambridge University and who now divides his time between Athens and San Francisco, agrees with Frantzolas. Given the crisis, Doxaras — a young man who is already on his third start-up — believe that young Greeks have “nothing to lose” and are “willing to take a risk.”

There’s a “big opportunity” in Greece, Doxaras told me because — given the relative insignificance of the local market – start-ups have to be global, both in their organization and their market. Warp.ly, for example, which offers big brands tools for mobile marketing, has its biggest client in Kuwait and, of its 22 fulltime staff, four are in the U.S., six in Europe and 12 in Athens.

In the Greek digital economy, even the smallest business have to be multinational.

Europe’s leaders are spinning plates


Pavlos: Greek people voting to survive


Greek jobless rate at 22 percent

Christina Plakopita concurs with Doxaras. Plakopita, a 28-year-old woman who has degrees in economics and real-estate development from London and Columbia universities, came back from the US to Greece to start-up and run Netrobe, an iPhone app designed as a virtual closet for young fashionistas which already has 40,000 users.

People said I was “crazy” to come back to Greece, Plakopita, who returned to Athens to live with her parents, told me. “But it was a great decision,” she explained, because digital is “booming” in Greece and it’s an ideal market to “think global and act local.”

Like Doxaras and Frantzolas, Plakopita’s confidence in the digital Greek rebirth is rooted in the wealth of human talent in Greece. I think they are correct. Having spent the last few days in the invigorating company of many Greek start-up entrepreneurs, I have been struck with their vitality, intelligence and ambition.

From early-stage collaborative workspaces like CoLab and 123p, to entrepreneurs from promising local start-ups like Taxibeat, Radiojar, Parking Defenders, Dailysecret, Joolmaworks, CrowdPolicy.org and Cookisto, it is self-evident that there is something very promising brewing in this nascent Greek digital economy.

So what could go wrong with this budding digital Greek renaissance?

The biggest problem, of course, remains the oppressively bureaucratic Greek state that, in spite of the crisis, continues to be a major obstacle to entrepreneurial innovation. “Failure in Greece in penalized,” John Doxaras told me about a system in which entrepreneurs can end up in jail if they bankrupt their companies. And every Greek start-up entrepreneur I met complained bitterly about arcane and ever-changing bureaucratic regulations that make setting up and running a company frustratingly complex and time-consuming.

Greeks pull money out of country’s banks

As Stavros Messinis, the co-founder of CoLab told me, Greece remains a “tough environment” for entrepreneurs. What’s missing, Messinis explained, is a both a legal and social acceptance of the idea of failure. There’s no “culture of forgiveness” for business failure in Greece, Messinis explained. And thus most Greeks remains terrified of failing, even though failure is the unavoidable norm of even the most successful start-up ecosystem.

Then there’s the broader cultural challenge of rewiring Greek minds for the digital age. As Warp.ly CEO Doxaras explained, most Greeks — even its younger generation — don’t “get” the idea that Greece, if it wants to compete in the 21st century global economy, has any other option but to become a start-up nation like Israel.

Oddly enough, a possible Greek exit from the euro is seen by many entrepreneurs as a much a blessing in disguise for their businesses as a catastrophe. “If you sell abroad you will get rich overnight,” Fotis Evagelou, the CTO of Joolmaworks, told me. While CoLab co-founder Stavros Messinis acknowledges that any start-up with clients overseas would benefit from the inevitable devaluation of the local currency that a Greek exit from the euro would trigger.

But does Greek economic failure really equal entrepreneurial success?

No, it’s not that simple. Messinis cautions that the return of the drachma would be “superbly negative” for entrepreneurs in the short-term, with exchange controls, massive layoffs, riots and empty supermarket shelves. John Doxaras even warns that a euro exit might result in significant power cuts thereby cutting off local digital companies from their lifeblood — access to the global network.

Yet in spite of the danger of a complete economic meltdown, the future remains full of opportunity for Greece’s young digital entrepreneurs. It won’t be easy, of course. But a country best known for its antiquities might turn out to be a key hub for radical innovation in our digital economy.






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Turkey holidays set to boom in summer 2013 says Holiday Mate

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