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The Debt Crisis and the Difference between a Strategic and a Tactical Surprise

Yoav J. Tenembaum - 8/19/2011

One of the main features that distinguish a crisis from a non-crisis situation is the element of surprise.

Very rarely is a crisis devoid of surprise.

There are two kinds of surprises: Strategic and tactical.

The first entails a surprise regarding the event with which decision-makers have to deal with.

The latter denotes a surprise not as regards the event itself, but rather as to its timing and/or place.

The announcement by the credit rating agency S&P of the downgrade of the United States from triple A to double A + with a negative outlook was perceived by the political and monetary decision-makers, as well as by the financial markets, as a strategic surprise.

To be sure, the possibility of a downgrade was known to all concerned well in advance. However, what they had in mind apparently was a downgrade – indeed, a sharp one - following a failure by the Democrats and Republicans to reach a deal. Once a deal was reached, a scenario of a downgrade was perceived to be unlikely.

The manner by which the deal was reached was the trigger to the downgrade by S&P. Thus, it was prompted by the political process which led to the deal, more so than by its economic dimensions.

This is precisely what caught all involved unprepared, so to speak. It was a strategic surprise per excellence; or was it?

Well, the possibility of a downgrade notwithstanding a possible deal between the two major political parties in the United States had not been discarded, to be sure. It was objectively on the cards. However, what matters, in this context, is not whether objectively there was a chance of a downgrade, but rather whether the decision-makers perceived it as such. Apparently, they didn't.

The objective existence of a potential surprise does not concern us here. What we are interested to determine is the subjective perception of its potential existence.

The difference between a strategic and a tactical surprise could mean the difference between a sharp and a moderate reaction. Had the decision-makers in Washington and particularly in the financial markets been psychologically prepared for a downgrade, without knowing in advance its precise timing, the reaction might have been more measured, with all the consequences entailed.

When credit rating agencies downgraded Greece's credit rating, the decision-makers concerned perceived it as a tactical, rather than as a strategic surprise. Considering the debt crisis besetting Greece, such a downgrade was expected. Its precise timing was not known.

A crisis cannot always be averted. Knowing in advance the possibility of its emergence, if not necessarily of its timing, can sometimes mitigate its immediate effects.

However, even if the political and monetary decision-makers are privy to information, of which the financial markets are not aware, revealing that an event might take place leading to a crisis, the overall reaction would be akin to a strategic surprise.

In other words, if investors in the market don't know of an impending crisis-leading event, whilst the highest echelons in the political and monetary systems do, the effect on the financial markets and the economy would be more like a strategic than a tactical surprise.

Thus, even if a privileged group of people in Washington knew in advance of the decision by S&P, the nature of the information involved in this case was such that, once it was officially announced, the strategic surprise for the investors produced a reality that rendered any prior knowledge in Washington almost irrelevant.