On the edge of panic, markets look for reassurance
The prospect of panic hitting the equity markets at Monday's opening has forced the G-7 finance ministers to call an emergency meeting to discuss both the US credit downgrade and the deteriorating debt situation in the Euro zone.
The Group of Seven leading economies agreed to hold an emergency phone meeting of finance ministers and central bank governors on Monday, Kyodo news agency reported on Sunday.
At the meeting, Finance Minister Yoshihiko Noda is expected to pledge that Japan will continue to buy U.S. Treasuries, Kyodo said without citing any sources.
The ministers will likely discuss measures to prevent turmoil in financial markets amid U.S. and European debt problems, it said.
Japanese government sources have said the G7 finance leaders will likely hold an emergency phone meeting, probably before Asian markets open on Monday...
Also, the European Central Bank will start buying Italian bonds now that Prime Minister Berlesconi has announced austerity measures, including a balanced budget amendment to the constitution and labor reforms.
But some on the continent see the twin crisis of debt getting worse:
German papers were both incredulous and gloomy on Sunday about the financial upheaval.
Welt am Sonntag dedicated an entire section to global economic uncertainties, entitled "Der Crash" (The Crash) and wrote: "No one could have foreseen this dramatic crash and now the situation can only be endured with gallows humor."
Der Spiegel magazine's front page featured euro and dollar banknotes going up in flames, with the headline "U.S. indebtedness, euro crisis, stock market chaos: Is the world going bankrupt?"
French newspapers carried grim headlines on Sunday with Le Journal du Dimanche trumpeting "The world on the edge of collapse" with a sub-headline saying: "The week starting should be crucial. Markets from now on are living in fear of a crash."
But the newspaper also ran an interview with economic consultant Alain Minc who said that despite the U.S. downgrade, the United States remained the "ultimate economic harbor."
How much should we listen to the messengers of doom and gloom? There is always a chance that a panic will cause a lot of problems, but there are institutional brakes in the stock market that would minimize any crash scenario. And as long as central banks in Europe and the US appear willing to take a direct hand in addressing the debt problems of the industrialized nations, there will probably be enough confidence in market mechanisms to offset the flight from equities that would occurr in a real panic situation.
Long term prospects are a different story. But short term, we should be able to avoid a serious crash.