Greek Crisis Map: The three phases of a crisis

This analysis of the three phases of a crisis is part of a larger document entitled the Greek Crisis Map. The three phases form a framework upon which some scenarios have been generated about the consequences of a Greek exit of the Eurozone and possible investment implications.

We now know the history thus far of the financial crisis, which moved from sector to sector and country to country from 2007 until its temporary peak in 2009. At all times the policy response has remained the same: “Extend-and-pretend”: at all times delay the inevitable confrontation with the solvency problem (too much debt) by printing money or enhancing liquidity and pretend that this is a real solution to the crisis and that everything will turn out right. As I have previously outlined in my commentary “Hope lies on the far side of a European summer of discontent”, a crisis often has three distinct phases:

• Denial
• Protest
• New mandate for real change

Let’s propose a framework that defines both where we are in the crisis lifecycle as well as a number of critically important factors that must be considered during a crisis, in descending order of importance:

With this framework in mind I will make the following assumptions in order to devise a number of potential scenarios: 

We are at the peak of phase two – the protest phase. The recent referendums and elections have merely been “against” something rather than “for” an alternative – there is not one single serious discussion going on which addresses what it will really take to reform the European Union’s financial and political system on even a national, much less a supranational level. The protests are in effect against the extend-and-pretend policies that were the outcome of the first phase of denial. Those efforts saw the creation of endless new piles of debt, money printing and gaping fiscal holes. The first mere whiff of austerity has voters - who are pretending that we can close the fiscal gaps without massive reform - howling in protest, even well before much of the austerity has been implemented.

And now we are entering the space between protest and mandate for real change. My hope, as an old grey haired trader that has seen quite a few different markets over the years, is that we are now 60-70 percent through the worst part of this crisis in terms of elapsed time, at least. It has been incredibly frustrating to witness the denial phase, particularly during the last few years. The protest phase dramatically ups the energy and leads more quickly to the denouement. Unfortunately, the bad news is that the scary transition - a potentially shocking revaluation of asset markets - that sets in motion the crisis’ exit phase must now take place.