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The crisis game – poker or chicken? February 1, 2009

Posted by Sverre in : Norwegian politics, Political economy , trackback

Norwegian newspaper Aftenposten had an interesting report before the weekend about the games surrounding the Norwegian government relief packages. They compare the gamchickene now played between the government and the banks. On one side of the table we have Prime Minister Jens Stoltenberg (Labour), and on the other we have the major bank managers, represented by Nordea CEO Gunn Wærsted. Each has three visible cards: a 7, Jack and Ace. The analogy might not be brilliant and ingenious, but it describes the game in a simillar manner to the game theories of Political Economy.The finance crisis ace of the government is that great revenues from offshore oil drilling means they have large reserves of capital. The government is able to dispense large relief packages if it wants to. But naturally, the government doesn’t want to play its ace and hand out government capital as subsidies to still profitable private banks unless it’s absolutely necessary.

The banks, on the other hand, are holding their ace, being the necessary lifeline business needs to stay afloat. Despite packages and central bank interest cuts, Norwegian banks are still holding back on loans to business and have been slow to cut interest rates. This is becoming a major problem for businesses that used to finance activities in the international bonds market. Current estimates are that Norwegian companies need to refinance about NOK 90 billions in bonds this year(2). With a dried up international finance market this needs to be replaced with domestic loans. Bank manager Wærstad is trying to make Prime Minister Stoltenberg play his capital ace before she needs to play hers – extending refinancing loans at acceptable terms to private business.

Both players have more cards in their hands. What Aftenposten designates as Wærsted’s jack is the fact that Norwegian banks are still making money. None of them are threatened by bankruptcy just yet, and can afford to wait. On the other hand, Stoltenberg holds a jack of his own – that bank losses will begin to increase as business get into trouble because of tight lending.

These cards all seem to amount to a classical scenario from game theory: The Chicken Game, also known as the Hawk-Dove game. Neither player wants to yield, but the worst possible outcome for both is if neither yields and they crash. And this all fits rather well. The worst possible outcome for the banks is is nobody extends credit to private business and we start to see mass bankruptcies. This will in turn give banks problems with getting their money back, getting them in trouble. The government on the other hand doesn’t want to hand out free money, but mass bankruptcies will lead to massive unemployment at a great political cost.

The last cards seem to me to be a different altogether, or possible strategies for avoiding the chicken game. The last of Stoltenberg’s cards Aftenposten identifies is the opportunity the government has to circumvent banks and start lending money to business directly. A number of government institutions already exist to support business. Already the semi-governmental export finance institution Eksportfinans has already received a substantial crisis package. Stoltenberg might also channel more money into various development and venture capital funds, or even in the last instance start a complete government bank.

The last cards the banks hold, according to Aftenposten is the opportunity to say no to help from the government if there are too many strings attached. Management bonuses and pay raises is a particular point the government wants to curb, not unlike the recent statements by Obama (Yahoo! News, Marketwatch) This seems to me like the one point where the analogies falter somewhat. Firstly, Norway doesn’t quite compare to the United States when it comes to executive bonuses. They are substantial, but not on the billion dollar level we’ve seen in banks like Merril-Lynch across the pond. Secondly, even if they should want to play hard ball with the government, I fail to see how refusing government subsidies or better than market rate loans from the government is likely to be a win situation for the banks.

Wærsted seems to agree this card is so poor she doesn’t want to play it. Today she, along with a number of finance top manager colleagues went public with a promise not to take any pay raises this year.  Even though they claim this has been the plan all along, it seems like a way to make themselves more acceptable to receive good terms on the new bank relief package promised by the government to be announced soon.

In the end, it looks to me like a piece of journalism in which Aftenposten wants to make this whole thing seem like an interesting game. In reality the government knows business depends on the banks, and the banks know they can’t run forever with nearly no access to international financing. Government can’t do away with the banking sector, but it really looks like Stoltenberg is holding the best cards.

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