Here's a selection of comments from top investors, economists and strategists on policies that need to be adopted to prevent market meltdown.

No growth, no deal

‘Aside from the immediate problem of restoring confidence and agreeing on a financial assistance structure that does not require rethinking every few weeks, there are two other significant unaddressed problems.

‘One is that structural change will not work in the absence of economic growth. Fiscal retrenchment may make longer-term sense but has uncomfortable echoes of the 1930s, when governments either raised interest rates to hang onto the gold standard or tightened fiscal policy in response to recession-induced deficits.

‘There needs to be a growth plan, in the form of looser near-term fiscal policy, greater liquidity provision or a weaker euro. Otherwise the longer-term structural reforms and fiscal discipline will be still-born.'

Andrew Bell, chief executive of Witan

Credit crunch Mk2

‘There is a real risk that a “disorderly” [Italian] default could take place, triggering even bigger writedowns for banks and the risk of further contagion.

‘There could be a full-scale credit crunch as depositors shifted money out of Italian banks for fear of losing out from redenomination if Italy then left EMU (a similar development is underway in Greece) and banks cut back on lending to companies and households in order to preserve capital ratios.

‘This pattern could be repeated across weaker countries in the eurozone. Financial institutions abroad would be even more reluctant to lend to their peers in the eurozone  – eurozone banks’ cost of dollar funding remains very high judging by the currency basis swap market – and might have to take a bigger hit on their existing exposures.’

John Higgins, senior markets economist at Capital Economics

Can-kicking is habit-forming

‘We expect yet another period of "muddling through" and this is unlikely to change unless there is another new major shock. Elsewhere, we are seeing slight improvements in other areas of the global economy, which might prompt a slight decoupling of markets.

‘The US economy now looks likely to avoid a return to recession, while better-than-expected economic news in China also gives us cause for tempered optimism.’

Tom Higgins, global macroeconomic strategist at US-based fixed income manager Standish

Serious recession on the way

‘Events over the past two weeks in Europe have been extraordinary. The latest escalation in the sovereign debt crisis has led us to reassess our economic forecasts.
We believe that the outlook for the eurozone economy is now significantly more negative and that politicians have missed their opportunity to prevent a European credit crunch.

‘Many eurozone banks are already on life support – unable to raise funds in capital markets and heavily reliant on liquidity from the European Central Bank. However, this will not be enough to stop banks from deleveraging, and reducing lending to the real economy.

‘As a result, we are now forecasting a serious recession in the eurozone in 2012, which is also likely to result in recessions in the wider European region, including the UK.’

Azad Zangana, European economist at Schroders

The North / South Divide

‘We are approaching crunch time, so much faster in the eurozone than many commentators had expected. Over the next two years, buyers have got to be found for approximately 400 billion euros of Italian debt, and at the moment it is not clear who those buyers might be. Banks are deleveraging and shrinking their balance sheets selling bonds, and international investors are fleeing back to their home markets.

‘It increasingly seems that quantitative easing (QE) introduced by the ECB is the only answer. But with the Bundesbank culture, and fear of hyperinflation, its introduction is going to require an enormous cultural shift in the minds of the central bankers. However, without it, Italy (and indeed Spain and Greece) runs the risk of running out of money, with all the accompanying economic and social consequences.

‘If an ECB led QE programme is not introduced, then a change in the make-up of the euro is the only probable outcome, and in our view the costs of this would far outweigh the risks and costs of QE. It is likely that we will see a hard-core of mostly northern European economies, congregate around Germany, leaving the Southern over indebted to devalue and start again.

‘It is difficult to see this occurring without it triggering at the very least, dislocation in the European financial system. It is time to prime those printing presses!’

Mark Burgess, CIO at Threadneedle Investments