New German government plans to rescue its banks and insurers underscored fears that a European banking crisis could be imminent, contributing to midday losses on Wall Street approaching 3%.
European markets were already closed when Bloomberg’s report of a German “Plan B” sent a signal to traders that German banks, and by extension other linked financial institutions, would suffer significant losses in the event of a Greek sovereign default. A new tranche of loans to Greece is currently on hold over the government’s failure to achieve revenue targets.
Earlier this week Deutsche Bank CEO Josef Ackerman lent credibility to fears of European bank contagion when, speaking at a conference in Frankfurt, he said: “It is obvious…that many European banks wouldn’t cope with having to mark the sovereign debt held in their banking book down to market value.” Ackerman also said bankers opposed forced recapitalization of banks. The terms of the new German government plan, and whether they were contingency plans or mandated recapitalization, were not known Friday afternoon.
Ackermann had been responding to IMF chief Christine Lagarde’s statement in Jackson Hole, Wyo., the previous week, calling for “mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary.”