World Bank President Robert Zoellick says eurozone leaders may be nearing a “break the glass” moment in which the pane protecting the emergency fire alarm gets smashed.

"While those living in the eurozone building, especially those on the executive floors, will not want to hear an alarm, they had best read the instructions," Zoellick writes in the Financial Times.

"Events in Greece could trigger financial fright in Spain, Italy, and across the eurozone, pushing Europe into a danger zone."

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

The summer of 2012 offers an eerie echo of 2008, notes Zoellick.

"Markets are signaling anxieties about a major asset class," he says. "In this round, eurozone sovereign debt has replaced mortgages as the risky investment. Banks are under stress. Depositors have not yet begun to run, but they are starting to jog."

Moreover, says Zoellick, the European Central Bank, like the U.S. Federal Reserve in 2008, has sought to reassure markets by providing generous liquidity, but collateral quality is declining as the better pickings on bank balance sheets are used up.

“When financial markets get anxious, peril often strikes two or three links down the financing chain,” Zoellick says. “So eurozone leaders need to be monitoring liquidity risks in the corporate sector.”

“And if banks get emergency assistance, bank executives will need to be pressed to keep providing customers with cash.”

No one wants to have to act on the “break the glass” instructions, Zoellick observes, but it is wise to read them and to be prepared.

“The seriousness of the emergency steps should encourage eurozone leaders to take precautions – such as getting ESM (European Stabilisation Mechanism) capital into banks now and agreeing on a medium-term funding assurance for countries such as Spain,” Zoellick says.

“This assurance could come from the ESM or partial deployment of eurozone bonds in ways that maintain market discipline on state financings.”

According to a report from NASDAQ, the current plan for ESM does not include direct recapitalization of banks.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.