The one European leader with the power to stanch the euro-zone debt crisis and prevent the world economy from sliding into a deep recession is Jean-Claude Trichet.
If the 68-year-old outgoing president of the European Central Bank were to deploy a fusillade of government bond buying and funding measures, plus a rate cut, he could salve panicky financial markets and buy European Union politicians some badly needed time to develop a lasting strategy for solving their sovereign debt crisis.
Whether he has the guts or can muster the support at his last ECB policy meeting on Thursday is another question.
It is not the central expectation of markets right now for Trichet to step boldly into the breach. But increasingly, prominent investors, bankers and world leaders are warning that absent fast action from Europe, for which only the ECB has the immediate tools, the world courts Great Depression.
George Soros issued that warning in the Financial Times Friday. U.S. Treasury Secretary Timothy Geithner a week earlier spoke of "catastrophic risk" from cascading default and called on the ECB to work with European Union leaders.
In Washington, Bill Rhodes, a senior adviser at Citigroup and a 50-year veteran of sovereign debt crises, described Trichet as the one man standing between the euro zone and disaster.
"I picture him as Atlas holding the euro zone together until the politicians do something. Let's hope he can hold out," Rhodes said Wednesday.
Painful market losses -- major stock indices have tumbled between 11 percent and 25 percent in the third quarter in bourses from Germany to New York and Shanghai -- merit firm response to stop the European debt crisis worsening.
The world economy is also slowing significantly and major data reports this week should provide more evidence. Japan releases its Tankan report Monday; the ISM index due the same day is expected to show U.S. manufacturing has stalled and virtually no U.S. job growth is forecast when September payrolls are released Friday.
Were central bankers wanting to send any common message this week on the mounting global risks, they have the opportunity. U.S. Federal Reserve Chairman Ben Bernanke addresses the Joint Economic Committee of Congress Tuesday, and the Bank of England meets Thursday and Bank of Japan Friday.
INTO THE BREACH
But it is the ECB meeting Thursday that is garnering most of the attention. Trichet could choose to unleash a barrage of measures with a two-fold goal -- of providing enough liquidity for financial markets to operate smoothly; and to assure the solvency of highly indebted countries, notably Italy and Spain, which would ease worries about survival of monetary union.
This would buy desperately needed time for EU leaders to finish erecting permanent defenses. They must agree on uses for their new rescue fund, the European Financial Stability Facility, or EFSF, which could recapitalize banks and take over the ECB solvency operations now done through bond buying -- steps unlikely to be completed before early November.
The ECB also could opt to slash interest rates, although inflation at a surprising 3 percent annual rate in August makes that a little harder to sell to hard-line ECB countries.
Both rate cuts and bond buying would invite outrage from the Germanic flank. It would accuse the ECB of treading into political waters, abandoning its price stability mandate, giving profligate governments a free pass to run high fiscal deficits and monetizing the debt.
Two German central bankers already have resigned this year in protest over ECB bond buying.
But an increasing number of prominent analysts and bankers say inflation is abating and deteriorating economic data justifies a large ECB rate cut. Deutsche Bank and JP Morgan are forecasting the ECB will cut by 50 basis points Thursday to 1.00 percent, although in a Reuters poll last Wednesday the consensus was for no change until 2012.
Financial market stresses would also justify stepped-up bond buying and further liquidity moves. Italy had to pay a record 5.86 percent to issue 10-year debt Thursday, up from 5.22 percent a month ago. Overnight EONIA rates leaped to 1.463 percent Friday, back at mid-July levels.
"The only way I can see for quick action to get through this until the politicians are lined up is for the ECB to act, although there is reluctance around that," said David Mann, U.S. chief economist for Standard Chartered.
Trichet has taken surprise action before. He was first among world bankers to spot severe financial strains and flooded markets with cash when the U.S. sub-prime credit imploded.
He also has the stature within Europe to adopt unpopular policies, and it would be a gift to his successor, Mario Draghi, who as an Italian would face credibility issues if his first act was to bail out his own country.
"If Trichet had any moxie, he would buy up all the Greek debt, and more of Italy and Spain, and he would expand the ECB balance sheets until the EFSF can buy it off its books and recapitalize the banks," said Carl Weinberg, chief economist at High Frequency Economics.
Further financial turmoil or more grim economic data this week could push Trichet's hand. As JP Morgan argued in its research report: "The tools to prevent a deep recession are available, but they need to be used."
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