no fold-em hold-em, Euro style

In the gaming establishment I occasionally frequent, low-stakes poker games are referred to as "no fold-em hold-em" meaning that the tables are filled with calling stations who will pay to see every available card.

I mention this because Barry Eichengreen has chosen a poker metaphor to describe the $1 trillion Euro rescue fund:

"rather than folding their cards, European leaders doubled down. They understand that their gamble will be immensely costly if it proves wrong. They understand that their political careers now ride on their massive bet. But they also understand that they already have too many chips in the pot to fold."

"They already have too many chips in the pot to fold"?

This is a common belief. I can't tell you how many times I have heard someone justify a bad call at the poker table by saying "I was pot committed".

But people, the logic of the irrelevance of sunk costs applies in poker too.

While it is true that the size of the pot in relation to the size of the required bet to stay in can encourage someone to stay in with a weaker hand (if you are getting 8 to 1 on your money, you only have to win 12% of the time to make the call mathematically correct), that is pretty much NOT the case for the Eurozone leaders.

In poker terms, they are making a bluff raise in the hopes of getting the bond markets to fold. It's got nothing to do with chips in the pot.

Look, at least some of the PIIGS are insolvent and will eventually default. Delaying default will make things worse for the debtor countries (though it has the potential to make things better for the lending banks, which (as usual) is the real purposes of the rescue fund).

He also seems to think that the Eurozone has already won the hand:

"Europe’s fortnight mirabilis was also marked by amazing – and erroneous – predictions. Greece would be booted out of the monetary union. The eurozone would be divided into a Northern European union and a Southern European union. Or the euro – and even the European Union – would disintegrate as Germany turned its back on the project....Those forecasting the demise of the euro were wrong because they misunderstood the politics."

I admit I am more comfortable forecasting some sovereign defaults than I am the demise of the Euro, but I am pretty sure that fight is far from over. I'd say there is easily still a 1 in 3 chance that the current Euro-zone system will not survive the next 5 years unchanged. In fact, you could already say it's been dramatically changed by the "unprecedented purchases of Spanish, Portuguese, Greek, and Irish bonds by the European Central Bank."

Two final thoughts.

(1) I just don't see the rescue fund as a slam dunk game changer.

(2) I'd like to play Barry heads up in Texas hold-em