Germany Planning Bank Recapitalization as ‘Plan B’ for Potential Greek Default

ForexTV NewsDesk   |  September 9 2011 2:18 EDT

ForexTV.com (New York) by Dylan Tulic

The German government is working on a plan to recapitalize the nation’s banks in the event of a Greek default, according to a story originally reported by Bloomberg News.

According to three coalition officials, who spoke on condition of anonymity because deliberations are being held in private, the plan would soften the blow for German banks and insurers if Greece does not meet the conditions of its aid package. If the next tranche of bailout money is not disbursed, the banks could face a loss of 50 per cent on their holdings.

According to the Bank of International Settlements, German institutions hold approximately $35 billion worth of exposure to Greek debt.

The plan highlights increased German concerns over Greece’s ability to hit targets for budget cuts and has threatened to withhold aid if the targets are not met. If that’s the case, “it’s up to Greece to figure out how to get financing without the eurozone’s help,” said German Finance Minister Wolfgang Schäuble in a speech to the Bundestag, the German parliament.

The news sent markets tumbling, as the Euro fell below 1.37 against the Dollar. In the U.S., all three major indices sold off, with the Dow Jones Industrial Average falling over 300 points, or 2.71% on the day, to below 11,000. The S&P 500 has so far lost 32 points, or 2.67%, and the NASDAQ has lost 64 points, or 2.51%. Financials led the retreat.

Europe did not fare any better, with the FTSE 100 closing down 126 points, or 2.35%, to 5,215. The German DAX lost 219 points, or 4.04%, to close at 5,190. The cost of insuring Greek debt rocketed to a record 3,238 basis points, meaning that it costs €3.2 million to insure €10 million of Greek debt for five years.

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