Market Preview: Desperate Measures

NEW YORK (TheStreet) -- There's not much argument out there about whether or not the situation in Europe constitutes desperate times.

The big questions now are when will the eurocrats step up and take the desperate measures that such times call for, and will it be too late? It's a good bet U.S. stocks are in for more of the roller-coaster action we've seen so far this week until those answers materialize.

Deutsche Bank sees cause for hope in the overall strength of the global economy but it's still keeping a sharp eye on the day-to-day headlines, most importantly the general elections in Greece. This latest trip to the polls will be interpreted as a referendum on whether the populace will ultimately be able to accept the austerity measures necessary to keep the country as part of the single-currency bloc.

"We remain concerned that markets are in danger of repeating the events of September last year when losses on European bank share prices triggered widespread contagion across FX, equity and commodity markets," the firm said earlier on Tuesday. "An optimist might suggest that the losses on European bank share prices so far in this cycle has surpassed the losses in Japanese bank share prices in the early 1990s and so support should start to appear at some point. We are in the optimistic camp given our still robust world growth outlook but near term sentiment remains focused on the outcome of the Greek elections."

Spain's $125 billion bank bailout plan also came under scrutiny by Deutsche Bank, which sees issues with the potential for displacing private credit holders in the current capital structure as well as the country's overall debt load. The firm paints a grim picture, saying the Spanish government now stands at "the edge of insolvency" and that Europe is "only half way through resolving the crisis."

"If a third of the excess private sector leverage goes onto the government balance sheet, then Spanish government debt to GDP rises to 106% by 2014, requiring fiscal tightening of 9% of GDP just to stabilize the government debt to GDP ratio," Deutsche Bank explained. "Furthermore, the vicious circle between weak banks and weak sovereigns remains in place (Spanish banks have 8% of their assets in government bonds). At some point it is critical to have banks being bailed out directly by the ESM [European Stability Mechanism] (not via the sovereign, as it the case now). This solution is still some way off."

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