Agencies and agency - getting the sequence right in the euro crisis

Mention the word "agency" right now in the government offices of Europe and you'll get a frosty response. Ratings agency S&P's downgrade of almost everybody and everything (and they're not done yet with banks and insurance funds) annoyed those trying to sort out Europe's crisis.

But "agency" is the word uppermost in my mind now for a different reason. Rarely in economics do you find so much dependent on the actions and decisions of a few human beings. In its philosophical sense, "agency" is the key to understanding the present situation, which I will summarise as follows.

1) Greece is close to the endgame. It needs a debt write off that puts its pubic finances on a sustainable future path. The proposal is 50%, "voluntarily" accepted by the creditors. I understand the IMF believes a "sustainable" settlement needs an 80% plus write off - and the IMF rules do not allow it to sign off deals that are unsustainable.

2) Numerous hedge funds are reported to have bought Greek debt so as to operate in the space of uncertainty this opens up, much as a gambler operates next to a roulette wheel. If the "haircut" is 80%, I am told, many of them lose money and are prepared to trigger credit insurance contracts that will then torpedo the entire deal. They will not lose money as a result, but the European banking system will go into crisis.

3) Beeping away at the edge of the radar is Hungary, which has enough money to last until November but whose government is absolutely determined to defy IMF demands for austerity in return for a bailout. Most Hungary watchers believe the government of PM Viktor Orban to be unpredictable, and entirely capable of simply choosing to default, should political conditions internally turn against them.

4) Mario Draghi, boss of the ECB, has turned the taps on to an unlimited supply of cash, provided by the Fed, Bank of England, BoJ etc - and has simultaneously bought unprecedented amounts of Italian and Spanish debt, and simultaneously allowed the European banks to store their money overnight in unprecedentedly huge amounts. He can go on doing this as long as Chancellor Merkel does not start getting punished electorally for allowing the ECB to become exposed to large amounts of financial junk.

5) Finally another Mario, Mario Monti, is trying to push through a series of austerity measures and reforms in Italy that could make or break the euro. Quite literally: if Italy comes good, and the markets believe its story, then the magnet that was drawing France away from the group of "solution" countries to the "problem" countries goes away.

So there are really six "agents" here in the short term: the Greek government, the biggest hedge funds - nobody will tell us who they are but Reuters tried to name them earlier this week; Orban in Hungary, Draghi in Frankfurt; Merkel in Berlin and Monti in Rome.

Now here's the thing. The debate about "agency" in sociology and philosophy revolves around how much real freedom of action a subject has. Are they really free to influence the outcome of events, our bound by the structural conditions that surround them.

Here's my take: Orban is really free. He has a 2/3 majority in parliament and has curtailed checks and balances on executive power. Draghi is for now really free. He has more or less cut loose from Merkel and the Germans and is doing unsaid and unheralded what people wanted him to do - print money, lend money, accept dud cheques as collateral. The hedgies are really free. They always are.

Not free are Merkel, Monti - because constrained by politics in Italy - and the Greek government. The latter have, off the record, briefed that the IMF's proposed austerity programme means "civil war". The most likely outcome of next week is they accept a fudged austerity programme that then does not work. One Greek commentator put it to me like this: "the people who sign a deal that gives away Greek sovereignty over debt that then goes wrong have to be prepared to be court-martialled". He wasn't joking.

Christine Lagarde of the IMF is not really free either because though she may like to square the circle between a "sustainable debt write off" of 80% and an unsustainable one at 50%, there are technocrats inside the IMF whose reputations depend on sticking to the letter of the Fund's rules. She would like to raise and lend $1 trillion but she can't. Her former boss, President Sarkozy, does not figure in my list of the major actors - because though still powerful, he's almost entirely dependent now on what Merkel and Draghi do.

So here's the next problem. Like in a chess game, it depends which of the actors has the next move. What looks a strong position if you can move first is a weak position if you move last; sometimes it's vice versa.

The next real move is supposed to be with Greece: it can, and probably will say my Greek sources, sign some kind of second bailout deal, involving an inadequate write off of its debt and an unachievable austerity programme. Then it will have an election.

The ECB will go on pumping. It may also cut interest rates. Viktor Orban is the wild card: one of my analyst sources put it to me last week:

"Orban believes in economic nationalism - he believes in a crusade against remnants of socialism/communism and will take whatever and any means necessary to achieve it with speed regardless of legality etc."

The IMF also has become a slightly wild card. It is no longer - it seems like prehistory now, the days of the Genoa protests etc - "a tool of America". America hasn't even paid its dues to the IMF! It is becoming more like a reflector of the balance of forces; more autonomous as an agent.

Mario Monti remains therefore the interesting figure. He warned Merkel this week to stop simply calling for more austerity and to cut Italy some bilateral slack. He half agreed with S&P's diagnosis - that the Eurozone is on the route to a self-imposed catastrophe with its insistence on "austerity only" - pleading that he, himself, is pursuing a more nuanced strategy of austerity plus growth-inducing structural reform.

Much still depends on who makes the first big move. If they come in the right order, it might look like this:

The Greeks do a deal on a second bailout that, by tactical negotiation, leaves key hedge funds out of the haircut.

The hedgies fail to trigger Armageddon in the CDS market.

Orban climbs down in his standoff with the IMF.

Draghi goes on printing money and accepting dud cheques so that, with the second Greek bailout, the pressure eases on Italy, and Monti can point to a fall in bond yields.

Then, as the credit crunch in Europe eases, the predicted recession turns out shorter and less deep.

Greece and Portugal probably still go bust at some point, and there is a political crisis in Hungary, but at least the periphery crisis is finally - they hope - sealed off from the wider financial system in the heart of Europe.

That's how it could look. It could equally end in disaster if, like Eric Morecambe in that famous encounter with Andre Previn, they "play the right notes but not necessarily in the right order".