Friday, September 9, 2011

Germany plans to bailout its financial institutions if Greece defaults

A Bloomberg article reports that Germany is planning to bailout its financial institutions if Greece defaults.

Doesn't the German government know that simply bailing out the financial institutions does not restore confidence in the banking system?  Rather, it confirms that the government, regulators and the financial institutions are hiding something.

There is an alternative to bailouts.  The German government could instead require that the financial institutions disclose all their current asset and liability-level data.  The market could then analyze this data to determine who is solvent and who is insolvent.

Of the banks that are insolvent, the question could be asked which are like Security Pacific and have a business model under which they could earn their way back to solvency and which are like Citi and need government assistance.
Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said. 
The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said. 
The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. 
German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress. 
Greece is “on a knife’s edge,” German Finance Minister Wolfgang Schaeuble told lawmakers at a closed-door meeting in Berlin on Sept. 7, a report in parliament’s bulletin showed yesterday. If the government can’t meet the aid terms, “it’s up to Greece to figure out how to get financing without the euro zone’s help,” he later said in a speech to parliament. 
Schaeuble travelled to a meeting of central bankers and finance ministers from the Group of Seven nations in Marseille, France, today as they face calls to boost growth amid increasing threats from Europe’s debt crisis and a slowing global recovery. 
The German government is awaiting the results of the Greek progress report and will decide what course of action then, a government spokesman said, speaking on customary condition of anonymity. 
European bank credit risk surged to an all-time high today and stocks fell worldwide on concern that the debt crisis is escalating....
“Countries must act now and act boldly to steer their economies through this dangerous new phase of the recovery,” International Monetary Fund Managing Director Christine Lagarde said in a speech in London today. “We must not underestimate the risks of a further spread of economic weakness or even a debilitating liquidity crisis,” she said. “That is why action is needed urgently so banks can return to the business of financing economic activity.” 

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