October 29, 2011

Parking Lot Science Comes to Analysis of the EuroZone Crisis

Posted in Economics, Financial Markets, Social Commentary at 9:56 am by Doug Brockway

There’s a joke about a drunk who drops and loses his car keys in a parking lot.  He then goes and looks for the keys under a street lamp not because it’s near the where he lost them but because that’s where the light is.  The point being that one should look for keys, or data and answers, where the keys are likely to be not just where you can easily look… or easily frame an issue.

This story came to mind while I was examining a decision tree developed by STRATFOR, a private intelligence company that was distributed by the renowned investor and analyst John Mauldin‘s weekly e-mail letter.  The decision tree examines what are the real likely outcomes that the Eurozone, and the rest of us, will experience as they wrestle with the sovereign debt crisis currently centered on Greece and its debt.

This is a chilly, scary, and as far as I can tell accurate representation of what’s to come.  I truly wish I knew what, if anything, I can practically do about it as an individual for my own account.  But, in addition to that, it occurs to me that this image is but one side of the coin and could easily have been laid out from an entirely different perspective.  Instead of asking “What to do about Greece?” the creditor, what if we asked “What to do about Sovereign Debt Lenders?”  That image might look like this:

Take it as a given that the standard story line about feckless Greek legislators making unwise deals with lazy workers and outdated unions is true and the individual Greeks have been behaving badly as Michael Lewis’ Boomerang might suggest.  My personal guess is that the image is overwritten.  My deeper point is that the lenders are not the naïfs here.  It is the lenders who have the years and years of financial experience, deep data, analysis skills and resources, …. and lawyers.

The negotiations in Europe have been slowed by how much of a haircut the lenders will take on the debt.  50% was the target this time and deemed too much by the lending community.  Think it through. If the lender’s bets are not written off the tax payers must come up with the difference.  Whether you look askance at bailouts as the Tea Party does or at the riches of the 1% as Occupy Wall Street does you have to wonder why Step 1 isn’t to wipe out the feckless lenders.  Of anyone, they knew what they were doing.