The Telegraph has an article on the European debt crisis that is well worth reading (H/T Real Clear Politics). While RCP has the title as “Europe Is Headed for a Meltdown,” the Telegraph‘s headline is the slightly less scary “Is Europe Heading for a Meltdown?” But the article is scary enough:

Mervyn King, the Bank of England Governor, summed it up best: “Dealing with a banking crisis was difficult enough,” he said the other week, “but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there’s no backstop.” …

The European financial crisis may look and smell rather different to the American banking crisis of a couple of years ago, but strip away the details — the breakdown of the euro, the crumbling of the Spanish banking system to take just two — and what you are left with is the next leg of a global financial crisis. Politicians temporarily “solved” the sub-prime crisis of 2007 and 2008 by nationalising billions of pounds’ worth of bank debt. While this helped reinject a little confidence into markets, the real upshot was merely to transfer that debt on to public-sector balance sheets. …

The problem is that this has to stop somewhere, and that gasping noise over the past couple of weeks is the sound of millions of investors realising, all at once, that the music might have stopped. Having leapt back into the market in 2009 and fuelled the biggest stock-market leap since the recovery from the Wall Street Crash in the early 1930s, investors have suddenly deserted. London’s FTSE 100 has lost 15 per cent of its value in little more than a month. The mayhem on European bourses is even worse, while on Wall Street the Dow Jones teeters on the brink of the talismanic 10,000 level.

Once a market has a change of mood such as this, the outcome is usually not a happy one, although it can take a while for the bottom to drop out. The market mood changed decisively on September 3, 1929, but it wasn’t until October 29 that the great crash occurred, and the market didn’t hit bottom (in the short term) until early December. Governments of the major financial powers had better be paying very close attention and very careful about what they say. We’re in dangerous psychological territory right now.