Greece is almost bankrupt. On May 19, 8.5 billion Euro of Greece bonds mature, and Greece does not have the money to pay its debt. Will Europe give a shoulder to Greece? The bonds have lost 12% in the past year, meaning that the public was aware of a non-negligible probability of government default.
And I sit in my cozy home, and wonder why the investors panic. If Europe does not thank Greece for its monetary carelessness with a 120 billion Euro present, then Greece is dead. And then nobody will buy bonds of any other weak European country, and Portugal and Spain will follow suit. And the European Union will die as well. Simple backward induction tells you that the 120 billion will end up in Greece. In fact, as the statements of the Greek Finance Minister show, in Greece they did this backward induction as well.
But Aumann tells us that we cannot agree to disagree. So if the bonds lost 12%, and since I have no additional information that the public does not possess, then indeed there is (or at least, was) a non-negligible probability of default. Was there indeed a chance that Europe would not pay for Greek’s irresponsibility? Was the drop in the bonds’ value necessary to convince Merkel and Sarkozy that the market believes that the existence of the EU is in danger? Anyone has a clue?