A drachma coin on display in this photo illustration taken in Athens, May 9, 2012. European policy makers are already preparing the ground for a Greek departure from the euro zone, insisting that the continent’s financial safety net is now strong enough withstand the fallout. This is questionable. But it is by no means a foregone conclusion that the Greeks will leave – at least not yet.Yorgos Karahalis/Reuters
Stock markets are in a tailspin and no bottom seems in sight, driven mainly by worries that Europe's sovereign debt and banking crises are about to lurch from being merely bad to a lot worse.
Policy makers have got to be getting nervous about experiencing another so-called Lehman moment, named after the bankruptcy of the U.S. investment dealer four years ago in September which precipitated the worst of the 2008-09 financial panic. The Dow Jones Industrial Average is edging nearer to a 250 point loss Friday, and we're not even close to the end of the session. European markets are now shut for the day, but a swoon in North America at the end of the trading day won't be a good harbinger for Monday on those markets and the ones in the Far East.
That has got to be concentrating the minds of policy makers on what might stop the rout and get investors calmed down.
Here are a few thoughts from a pair of savvy market analysts. If you see any signs that leaders are adopting any of their suggestions, the risk-on trade will likely come roaring back.
Andrew Busch, public policy strategist at BMO Capital Markets, has given his clients a list of 10 things to watch out for. Among them, he says the European Central Bank has got to open the money spigots again and slash interest rates. More specifically, he's watching for the bank to start buying the bonds of member countries again to stabilize their prices and introduce another massive liquidity measure to inject funds into private banks. The ECB should also agree to allow borrowing for direct capital injections into banks, while the IMF should be utilized to inject money into Spanish banks.
Among other steps, the Federal Reserve Board in the U.S. needs to extend its current program of exchanging shorter term securities for longer term government bonds for another six months.
"Overall, the money moving out of European banks is a sign that the pot is ready to boil over and this is a great catalyst for action," he told clients, although he warned that things aren't yet bad enough for leaders to act. "At this point, there is no reason to believe the pain is unbearable for politicians and this means the strong trends to the downside for risk are not over for the markets."
Another view comes from Tony Boeckh, head of Montreal money manager Boeckh Investments Inc. who offered steps that will signal to him that authorities are getting serious about the crisis.
He says a big part of Europe's problem is too much austerity. Current budget cutting must be eased to gradually achieve fiscal consolidation, accompanied by deregulation steps to spur growth. Policy makers also have to increase the firewall to protect weak euro zone countries. Germany, as the main country with a surplus needs to raise growth, wages and inflation.
Mr. Boeckh also believes there will need to be bailout funds with such awesome firepower that investors will have confidence enough money will be forthcoming to handle even worst case scenarios. This would include help from the U.S., U.K., Japan, China, the IMF and others.
Actions have to happen quickly. "Time is of the essence now. Intra-euro zone flight capital from the peripheral debtor, particularly Greece, is accelerating and may precipitate a shift from crisis to crash in a matter of weeks," he wrote.
On the optimistic side, he said that "crises, when severe enough, do concentrate the mind."