World Collapse Explained in 3 Minutes

Gloom beats boom as house prices fall faster here than anywhere else

By Thomas Molloy

Wednesday September 19 2012

IRISH house prices continue to fall faster than anywhere else in the world, the IMF says in a new report. The Greeks are next, while Germans and Brazilians are seeing steep price gains.

The three countries with the steepest declines in the 12 months to March, when adjusted for inflation, are the three bailout countries of Ireland, Greece and Portugal.

Spain, which has already received a banks bailout, and which is widely expected to seek a formal bailout sometime next month, had the fourth worst decline.

At the other end of the spectrum, house prices in booming Brazil are up more than 15pc while those in Germany have gained more than 10pc. Other countries which have also had increases include the Ukraine and the Philippines.

While plunging house prices have caused well-documented problems here, rising prices are also leading to widespread angst in Germany and Brazil, where many people have been priced out of the market and rents are soaring -- creating challenges for policy makers and worries about inequality.

The IMF working paper finds that Irish prices are no longer misaligned, but are still more expensive than countries such as Germany when wages and other factors are taken into account.

Australia, which is enjoying a commodity-inspired bubble, has the most "misaligned" prices in the world, according to the study of 54 countries.

While many believe that our house price collapse was the worst in the world, the IMF study suggests that Estonia holds that distinction.

House prices fell further in Estonia, the Ukraine and Lithuania.

However, declines here have continued for longer than most other countries, which means that we may yet chalk up the worst bust in history.

The report says that house prices in the US have started to pick up a little recently, but globally prices are still on a down trend. While overall the trend is mixed, there is no sign of an uptick in the global index of house prices.

The findings suggest that long-run price dynamics are mostly driven by local factors such as income and population growth. The effect of more globally connected factors such as interest rates appears to be less strong.

Credit market conditions can have an impact in the short run and, ultimately, when the correction starts, affect both financial stability and the overall economy.

House price growth can be explained by several short-run factors, such as growth in incomes, asset prices, and population, and long-run-factors, such as the ratio of house prices to incomes.

The difference between actual house prices and those predicted on the basis of these fundamental factors gives another indication of whether prices may have more room to fall.

- Thomas Molloy

Irish Independent

http://www.independent.ie/business/world/gloom-beats-boom-as-house-prices-fall-faster-here-than-anywhere-else-3234147.html

How do governments go bust?

 Solutions:

1. Raise taxes

2. Cut spending

3. "Printing money" / Bailout

The European debt crisis explained: The debt levels around the globe are unprecedented in peacetime.

The European debt crisis explained: The debt levels around the globe are unprecedented in peacetime.

The odds of restructurings and/or defaults are higher than most believe. When does debt become unsustainable? The video shows the debt levels of numerous countries have reached "problem" levels. Since the bill coming due in the form of maturing bonds is so large, policymakers in Europe have no easy way out.

"Solutions" may include printing money to create inflation or debt restructurings/defaults; or a combination of the two. 

Chris Ciovacco of Ciovacco Capital Management compares healthy markets to the current state of affairs.
Which investments tend to perform well during deflation/defaults/restructurings?
Which investments tend to perform well during periods of inflation/money printing by central banks?
What is a back-door bazooka?

 A breakdown of the European debt situation, starting with Greece and consuming the entire continent.

Global Financial Crisis and World Collapse Explained

Global Financial Crisis explained in 96 seconds.



World Collapse Explained in 3 Minutes

ECB cuts rates but downplays crisis help

December 9, 2011 - 6:04AM

The European Central Bank acted to soften a looming recession and avert a credit crunch by cutting interest rates and offering banks long-term funds on Thursday but spooked markets by dousing hopes of dramatic crisis-fighting action in the euro area.

ECB President Mario Draghi discouraged expectations that the bank would massively step up buying of government bonds if European Union leaders, gathering in Brussels for a crucial summit, agree on moves towards closer fiscal union.

He said the euro zone's rescue fund should remain the main tool to fight bond market contagion, despite its clear limits, and said it was illegal for the ECB or national central banks to lend money to the IMF to buy euro zone bonds, appearing to veto one firefighting option under active consideration.

To counter that, Draghi announced unprecedented action to support Europe's cash-starved banks with three-year liquidity and cut interest rates back to a record low 1.0 percent.

The euro and European shares dived as markets, increasingly convinced that only the ECB has the power to protect the euro zone, focused on what Draghi was cool about rather than the measures he announced.

"One step forward, two steps back," said Alan Clarke, UK and euro zone economist at Scotia Capital. "The euro zone leaders might as well not bother. Pack their bags, go home, enjoy the weekend and do their Christmas shopping."

The ECB cut its main rate by a quarter-point and flagged a strong chance of recession next year. Draghi admitted the central bankers had been divided even on that decision.

"The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks," he told a news conference.

French President Nicolas Sarkozy dramatised the danger facing the 17-nation single currency area hours before their eighth crisis summit of the year in a speech to European conservative leaders in the French port city of Marseille.


"Never has the risk of Europe exploding been so big," he told leaders including German Chancellor Angela Merkel and the heads of the EU institutions.

"The diagnosis is that the euro, which should inspire confidence, is not inspiring this confidence," the French leader said. "If there is no deal on Friday, there will be no second chance."

France and Germany used the Marseille meeting to lobby for their plan to amend the European Union treaty to toughen budget discipline, which they want to have ready by March. But several countries are sceptical of full-blown treaty change.

German Chancellor Angela Merkel said she was convinced leaders would find a solution to the euro crisis at the summit.

The new ECB chief said his remark last week that "other measures" might follow if euro zone leaders agreed to seal tougher new budget rules had been overinterpreted as hinting the bank could step up bond purchases.

"I was surprised by the implicit meaning that was given," Draghi said, without offering an alternative interpretation.

The plight of Europe's banks was thrown into sharp relief. Two financial sources told Reuters that watchdog the European Banking Authority had told them to increase their capital by a total of 114.7 billion euros, significantly more than predicted two months ago.

A Reuters poll of economists found that while 33 out of 57 believe the euro zone will probably survive in its current form, 38 of those questioned expect this week's summit will fail to deliver a decisive solution to the debt crisis.

DIVISIONS

Euro zone officials said the summit was likely to decide to bring forward the launch date of a permanent bailout fund to 2012 from mid-2013. Before Draghi spoke, one euro zone source said negotiators were close to agreement for their central banks to lend 150 billion euros to the IMF for firefighting.

However, a proposal to give the permanent European Stability Mechanism a banking licence with access to ECB funding was "off the table" due to German opposition.

The EU remains divided over the need for treaty change. Summit chairman Herman Van Rompuy is urging leaders to avoid a laborious full overhaul that could take up to two years and face uncertain ratification. He wants them instead to slip stricter budget enforcement through in a protocol to existing treaties.

This infuriated Merkel and was one reason behind a gloomy briefing by a senior German official on Wednesday, who dampened hopes for a breakthrough and said some leaders and institutions still didn't understand the severity of the crisis.

If all 27 EU states do not support more fiscal union by adapting the existing Lisbon treaty, which took eight years to negotiate, then Sarkozy and Merkel want the 17 euro zone countries to go ahead alone with more integration.

"Should it turn out that not all 27 are able to go down this path, then we have to make a treaty change for the 17 euro states," said Luxembourg premier Jean-Claude Juncker, who chairs the grouping of euro zone finance ministers. "I don't want this but I don't exclude it."

Swedish Prime Minister Fredrik Reinfeldt, speaking for a non-euro state, said: "We want to stick with the 27 concept of course because all of us are members of the European Union and we want to have our influence. We want to keep the European project together."

The Franco-German plan would slap automatic penalties on countries that overshoot deficit targets and make countries anchor a balanced budget rule in their constitutions. The sanctions could be stopped only if three quarters of euro zone countries are against them.

Not all euro zone countries are comfortable with all the French and German proposals, with Finland opposed to their call for majority votes on major policy decisions.

U.S. Treasury Secretary Timothy Geithner, ending a visit to Europe to urge decisive action with talks with new Italian Prime Minister Mario Monti, said it was essential for European leaders to strengthen their financial firewall to give economic reforms a chance to work.

Monti is pushing through economic reforms after the euro zone's third biggest economy found itself sucked to the centre of the debt crisis.

In one glimmer of positive news for stressed euro zone countries, two big financial clearing houses cut the cost of using Italian bonds to raise funds following some easing in the country's bond yields.

Reuters



Read more: http://www.smh.com.au/business/world-business/ecb-cuts-rates-but-downplays-crisis-help-20111209-1olyh.html#ixzz1fzJNGtpk

US stocks fall on Europe woes

December 9, 2011 - 9:01AM
UPDATE

Wall Street fell after the European Central Bank dashed hopes that policy-makers were preparing a financial "bazooka" to contain the debt crisis, and Germany rejected some proposals to add power to the euro zone's bailout fund.

US markets have been on edge all week in anticipation of a summit deal that would come to grips with the euro zone's growing debt crisis, and pave the way for greater action by the ECB to hold down bond yields.

But actions from Europe - both early and late in the day - were a stark disappointment.

Before the market's open, ECB President Mario Draghi discouraged expectations that the central bank would massively increase its purchases of government bonds after a crucial Brussels summit on Friday.

Shortly before the closing bell, Germany rejected some measures in draft conclusions from the summit, including giving the European Stability Mechanism (ESM) a banking license and issuing common euro-zone debt. US stocks and the euro fell sharply following the news. 

"It looks like it's (the opposition) coming from Germany. That just spells more trouble ahead in the days to come," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

More than 44,500 S&P E-Mini futures contracts traded between 3:40 p.m. and 3:45 p.m., when the Germany headline appeared. This was the busiest five minutes of the day, other than the last five minutes of trading, which typically has the highest volume.

Banks slide


The S&P financial sector index was the biggest loser, falling 3.7 per cent. That followed sharp losses in European banks' shares as sources told Reuters the European Banking Authority (EBA) sees the capital shortfall at European banks at 114.7 billion euros ($154 billion).

Shares of Morgan Stanley, a barometer of risk aversion due to its perceived exposure to Europe's crisis, fell 8.4 per cent to $15.88.

The latest developments from Europe overshadowed a cut in the bloc's interest rate to a record low 1 per cent and extra liquidity provisions for banks.

The Dow Jones industrial average tumbled 198.67 points, or 1.63 per cent, to end at 11,997.70. The Standard & Poor's 500 Index fell 26.66 points, or 2.11 per cent, to 1234.35. The Nasdaq Composite Index lost 52.83 points, or 1.99 per cent, to close at 2596.38.

The decline comes after three days of gains for US stocks when the S&P 500 tried and failed to stay above its 200-day moving average, which has been a key level for investors to watch this year, and one that could prove tough to break.

But Thursday's pullback, concentrated in economically sensitive areas, was a far cry from the wild swings of recent months when uncertainty over Europe has dominated headlines. That is being seen as a sign of resilience by many investors who are hoping for seasonal strength into the end of the year.

Yields on European sovereign debt spiked. Ten-year Italian government bond yields rose 44 basis points to 6.51 per cent - the day's high. German Bund futures hit a session high of 136.89, up 109 ticks on the day.

Earlier, data showed US jobless claims fell more than expected in the latest week, a sign the labor market recovery was gaining momentum. Claims slid to a nine-month low.

Reuters



Read more: http://www.smh.com.au/business/markets/us-stocks-fall-on-europe-woes-20111209-1olzd.html#ixzz1fzHBjN8R

Irish PM warns of pain ahead for country

Ireland's prime minister, Enda Kenny, makes the first televised address to the nation in a quarter of a century, saying many of its citizens' financial situations would get worse before they got better.

10:16AM GMT 05 Dec 2011

Follow the Telegraph's live debt crisis coverage

Speaking ahead of the Irish government's first budget, Mr Kenny warned it would be the harshest of its five-year term and admitted that no one inIreland would be left unaffected by the austerity drive.

"I wish I could tell you that the budget won't impact on every citizen in need. But I can't," he said.

"I know this is an exceptional event but we live in exceptional times and we face an exceptional challenge."

The speech was made under 2009 legislation that allows the prime minister to address the nation on television in the event of a major emergency. The last time this happened was in 1986.

RELATED CONTENT

• Ireland's Enda Kenny warns of need for more austerity

Mr Kenny was swept to power with a record majority in February on a wave of voter anger over the country's economic collapse and the harsh rescue terms laid down by its European partners.

His predecessor Brian Cowen was widely criticised for not addressing the nation on the financial crisis that led the state to take on tens of billions of euros of debt from private banks and eventually to a EU-IMF bail-out.

Since its election in February, the government has broadly maintained its support, with an opinion poll on Sunday giving Mr Kenny's centre-right Fine Gael party 32 per cent, down from 36 per cent in the election.

http://www.telegraph.co.uk/finance/financialcrisis/8935137/Irish-PM-warns-of-pain-ahead-for-country.html

Italy welfare minister breaks down in tears as government agrees austerity measures

Italy welfare minister breaks down in tears as government agrees austerity measures


Elsa Fornero, the Italian welfare minister, broke down in tears as the technocratic government adopted an aggressive €30bn (£26bn) austerity package in a bid to stave of the crisis enveloping the country.

6:30AM GMT 05 Dec 2011

Mario Monti, the Italian prime minister, declared the package of tax hikes, budget cuts and pension reforms a "decree to save Italy", at a press conference following after a cabinet meeting.

Italy will "put its deficit and debt under strong control" so that the country is "not seen as a suspicious flash point by Europe," he said.

He also warned that Italians had to make "sacrifices" and said he was renouncing his own salary as prime minister in a gesture of solidarity.

The three-year package includes a controversial pension reform that will increase the minimum pension age for women to 62 starting next year and fall into line with men by 2018, by which time both will retire at 66.

The number of years that men have to pay contributions to receive their full pensions will also be increased from the current level of 40 to 42.

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Ms Fornero, whose proposals have already been criticised by Italy's main trade unions, broke down as she outlined the changes.

"We had to... and it cost us a lot psychologically... ask for a..." Ms Fornero said, but was unable to complete her sentence as she wiped tears from her eyes.

Mr Monti finished the sentence for her, speaking the word "sacrifice" that she'd been unable say.

The package also increases taxes on housing and luxury items and raises value-added tax - which has already been raised by one percentage point this year - by two percentage points to 23 percent from the second quarter of 2012.

Final approval of the reforms in parliament is expected before Christmas.

The crucial government meeting had been scheduled for Monday but it was brought forward by Monti in a bid to finalise the budget reforms before the markets open in a crucial week for the future of the euro.

A former top European Union commissioner who came to power just three weeks ago after the flamboyant Silvio Berlusconi was ousted by a wave of panic on financial markets, Monti said Italy was at a dramatic crossroads.

"We're faced with an alternative between the current situation, with the required sacrifices, or an insolvent state, and a euro destroyed perhaps by Italy's infamy," he said.

Italy is under intense pressure from its eurozone neighbours and international investors to introduce draconian measures to rein in its public debt ahead of a crucial European Union summit on Thursday and Friday.

Rome has already adopted two austerity packages this year but the European Commission indicated that the eurozone's third largest economy would fail to reach its target of balancing the budget by 2013 without more belt-tightening.

Italian unions voiced their opposition, even though a planned overhaul of labour laws to make it easier for companies to fire workers has been postponed to a future date.

Susanna Camusso, head of Italy's largest union, the CGIL, said the measures were aimed at "making money on the backs of poor people in our country."

"There is no equity" in the proposed package, she said, adding that all the main unions should team up to evaluate their response to the measures.

Economists are worried that the toxic mix of high borrowing costs, massive debt and low growth could push Italy - the eurozone's third largest economy - towards insolvency within months.

The government has denied persistent rumours that it is preparing to accept a credit line from the International Monetary Fund (IMF), following in the wake of bailouts for fellow eurozone members Greece, Ireland and Portugal.

But the IMF and the EU have been keeping Italy under special surveillance through teams of auditors to ensure it implements long-delayed reforms and a reduction in a debt mountain equivalent to 120 percent of output.

France and Germany say a debt blow-up in Italy could kill off the entire euro area and observers warn Italy is "too big to bail" in case of a default.

Angelino Alfano, the leader of Berlusconi's People of Freedom party, the biggest party in parliament, also put the situation in stark terms: "The choice is between a harsh plan today and the risk of bankruptcy tomorrow."

Spain's banks hold billions of euros in properties that will be tough to sell

The Real Threat Facing Spanish Lenders

Spain's banks hold billions of euros in properties that will be tough to sell

One analyst estimates it could take 40 years for banks to unload their holdings Denis Doyle/Bloomberg

While Europe’s sovereign debt crisis grabs all the headlines, distressed real estate may pose a bigger threat to the Spanish banking system. The country’s lenders hold about £30 billion ($41 billion) of unfinished homes and land that’s “unsellable,” according to Pablo Cantos, managing partner of MaC Group in Madrid. MaC Group is a risk adviser to several leading Spanish banks. “I’m really worried about the small and medium-size banks whose business is 100 percent in Spain and based on real estate growth,” says Cantos. He adds that only bigger, more diversified lenders such asBanco Santander (STD), Banco Bilbao Vizcaya Argentaria (BBVA), La Caixa, and Bankia are strong enough to survive their real estate losses: “I foresee Spain will be left with just four large banks.”

Spain’s central bank tightened rules last year to force lenders to set aside more reserves against property seized in exchange for unpaid debts and is pressing them to sell assets rather than wait for the market to recover from its four-year decline. Yet unloading the real estate may be difficult or impossible. Bank-owned land “in the middle of nowhere” and unfinished residential units will take as long as 40 years to sell, Cantos predicts. Fernando Rodríguez de Acuña Martínez, a consultant at Madrid-based adviser RR de Acuña & Asociados, has a more dire view. About 43 percent of unsold new homes are in exurbs far from city centers, he says, and “if you take into account population growth for these areas, there’s no demand for them. Not now or in 10 years.”

Dozens of Spanish banks have failed or been absorbed since the economic crisis ended a debt-fueled property boom in 2008. The cost to taxpayers of cleaning up the industry’s books has come to £17.7 billion so far. Banks may face increased pressure following Nov. 20 national elections that propelled the conservative People’s Party to power. Its leader, Mariano Rajoy, has said the “cleanup and restructuring” of the banking system is his top priority.

“Stricter provisioning rules for land need to be implemented,” says Luis de Guindos, director of PricewaterhouseCoopers and IE Business School Center for Finance. De Guindos has been named by newspapers as a contender for finance minister in a Rajoy government. “Many banks will be able to deal with it, but others won’t.”

Idealista, Spain’s largest real estate website, currently advertises 45,912 bank-owned homes there, up from 29,334 in November 2010. In 2008 it didn’t list any.

Spanish home prices have fallen 28 percent, on average, from their peak in April 2007, according to a Nov. 2 joint report by Fotocasa.es, a real estate website, and the IESE Business School. Land values fell 33 percent nationwide. Fernando Acuña Ruiz, managing partner of Taurus Iberica Asset Management, a Spanish mortgage servicer, expects the slide in home prices to continue. “Spain has 1 million new homes that won’t be completely absorbed by the market until the middle of 2017,” he says. “Prices will fall a further 15 percent to 20 percent in the next two to three years.”

Banks are reluctant to acknowledge the size of the declines. There is an “enormous” gap between prices offered by lenders and what investors are willing to pay, preventing sales of large property portfolios, MaC Group’s Cantos says. He estimates that prime assets can be sold at a 30 percent discount, while portfolios comprising land, residential, and commercial real estate may sell only after 70 percent discounts. “Therein lies the problem,” he says. “Banks have already provisioned for a 30 percent loss, but if you are selling at 70 percent discount, you have to take another 40 percent loss. Which small and medium-size banks can take such a hit?”

The bottom line: With home prices down 28 percent from the peak, real estate losses may swamp smaller lenders, leaving Spain with four big banks.

Smyth is a reporter for Bloomberg News.

'Ten days to rescue euro' as leaders call for IMF funds

Europe faces a crucial ten days to save the eurozone, a leading EU monetary chief warned after finance ministers from the currency bloc admitted they may need IMF help to increase the firepower of their bailout fund.

Economic and Monetary Affairs Commissioner Olli Rehn said the EU had little time to conclude its crisis response. 

By Martin Strydom

10:45AM GMT 30 Nov 2011

"We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," Economic and Monetary Affairs Commissioner Olli Rehn said on Wednesday as EU finance ministers met in Brussels.

His comments came as Gerard Lyons, chief economist at Standard Chartered, said: "The euro cannot survive in its present format."

"Throughout the year I have stressed that the world economy could suffer a double-dip if it was hit by one of three factors: an external shock, a policy mistake or a loss of confidence. Unfortunately, in recent months, the euro area has been hit by all three. And that is why the euro area will slip back into recession in 2012," he said in his Economic Outlook for November.

He warned that the scale of the downturn will be determined by eurozone leaders' policy actions and the extent to which confidence is hit.

Confidence in Europe remained low in financial markets on Wednesday on disappointed at attempts to increase the firepower of the eurzone bailout fund.

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Italian and Spanish borrowing costs continued to rise and stock markets fell after Wolfgang Schauble, Germany's finance minister, said Europe's "big bazooka" rescue fund is not ready and won't stem the region's debt crisis.

Eurozone finance ministers, who were meeting ahead of the Ecofin summit today, acknowledged the €440bn (£376bn) fund would not win support to leverage it up to €1 trillion. Its capacity would be between €500bn and €700bn instead – a total that is unlikely to be big enough to rescue Spain and Italy.

"The situation in Europe and the world has significantly worsened over the past few weeks. Market stress has intensified," said Christian Noyer, France's central bank governor and a governing council member of the European Central Bank.

On Wednesday, Swedish finance minister Anders Borg renewed pressure on the European Central Bank to help halt the debt crisis.

"We need to keep all options on the table, to my mind price stability is secured in Europe - therefore there is some room also for the central bank to maneouvre on this issue," Mr Borg said as the 27 EU ministers gathered to pick up the thread of overnight eurozone ministerial talks.

He also said IMF contributors had to raise their input.

Belgium's Didier Reynders said finding a solution that would deliver a big enough pot of money to deal with debts that easily dwarf existing bailouts for Greece, Ireland and Portugal would need "the (European) central bank as well as the IMF".

The call for a bigger role for the ECB will lead to a clash with Germany which opposes such a move and last week got France and Italy to agree to stop pressuring the central bank to help.

Christine Lagarde, the head of the IMF, warned in September that its $384bn (£248bn) war chest designed as an emergency bail-out fund is inadequate to deliver the scale of the support required by troubled states.

Members of the IMF have agreed to increase the fund's resources but a senior G20 official in Asia told Reuters on Wednesday that no progress had been made so far.

The United States has insisted that the European Union has enough resources to stem the crisis without outside help.

http://www.telegraph.co.uk/finance/financialcrisis/8925250/Ten-days-to-rescue-euro-as-leaders-call-for-IMF-funds.html

Iceland wins in the end

By Ambrose Evans-Pritchard Economics Last updated: November 28th, 2011

The OECD has come very close to predicting a depression for Europe unless EU leaders conjure up a lender-of-last resort very quickly, and somehow manage to make the world believe that the EFSF bail-out fund really exists.

Even if disaster is avoided, the eurozone growth forecast is dreadful. Italy, Portugal, Greece will all contract through 2012, while Spain, France, Netherlands, and Germany will bounce along the bottom.

Unemployment will reach 18.5pc in Greece, 22.9pc in Spain, 14.1pc in Ireland, 13.8pc in Portugal.

Yet Iceland stands out, with 2.4pc growth and unemployment tumbling to 6.1. Well, well.

Here is the box from the OECD.

Iceland's policy of drastic devaluation with capital controls has not proved to be the disaster that so many foretold. Its refusal to accept the full burden of private bank losses has not turned the country into leper-land.

The nation has held its social fabric together. Had Iceland been in the eurozone, it would have been forced to pursue the same reactionary polices of "internal devaluation" and debt deflation being inflicted today on the mass ranks of unemployed across the arc of depression.

Sorry I could not resist posting this. Shame on me.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100013462/iceland-wins-in-the-end/

Financial Crisis: German push for Greek default risks EMU-wide 'snowball'

Germany is pushing behind the scenes for a "hard" default in Greece with losses of up to 60pc for banks and pension funds, risking a chain-reaction across southern Europe unless credible defences are established first.

German Chancellor Angela Merkel and Greek Prime Minister George Papandreou. Officials in Berlin told The Telegraph it is 'more likely than not' that investors will suffer fresh losses on holdings of Greek debt Photo: AFP

By Ambrose Evans-Pritchard

9:13PM BST 10 Oct 2011

456 Comments

Officials in Berlin told The Telegraph it is "more likely than not" that investors will suffer fresh losses on holdings of Greek debt, beyond the 21pc haircut agreed in July.

The exact level will depend on findings by the EU-IMF "Troika" in Athens.

"A lot has happened since July. Greece has fallen back on its commitments, so we have to assume that the 21pc cut is no longer enough," said one source.

Finance minister Wolfgang Schäuble told the Frankfurter Allgemeine that the original haircuts were "probably" too low, saying banks must have "sufficient capital" to cover greater losses if need be. Estimates near 60pc have been circulating in Berlin.

The shift in German policy has ominous echoes of last year when Chancellor Angela Merkel first called for bondholder haircuts, setting off investor flight from Ireland and a fresh spasm in the EU debt crisis.

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"This could set off a snowball effect," said Andrew Roberts, credit chief at RBS. "The markets will instantly switch attention to Portugal, where two-year yields are already 17pc".

Although Greece's 10-year bonds are trading at a 60pc discount on the open market, European banks do not have to write down losses so long as there is no formal default and the debt is held in their long-term loan book. The danger arises if banks are forced to "crystallize" the damage before raising their capital buffers.

Marchel Alexandrovich from Jefferies Fixed Income said Germany risks opening a "Pandora's Box" by unpicking the Greek deal.

"It would be a complete disaster, a signal that sovereign debt is not safe. Investors would pull their deposits out of Portugal, Ireland, Spain and Italy and set off bank runs across Europe," he said. "The French are against doing this and so is the European Central Bank. They know banks need more time to adjust. We don't think Europe will pull the trigger."

Mrs Merkel and French president Nicolas Sarkozy vowed over the weekend to do "all that is necessary to guarantee bank recapitalisation", promising a package for Greece and the eurozone by the end of the month. The pledge was vague.

"No details of the plans were released, presumably because they haven't actually got any yet. That in itself is astonishing," said Gary Jenkins from Evolution Securities. "Nothing has really changed and we still expect that the most likely outcome will be a comprehensive package – that circles the wagons around the sovereigns and the banks – that will only be agreed at one minute to midnight when the alternative is that the market is about to implode on the Monday morning."

France and Germany have yet to agree on how to beef up the banks, or on the scale of the threat.

Antonio Borges, Europe chief for the International Monetary Fund, said lenders may need up to €200bn to cope with losses.

France wants banks to be able to tap the EU bail-out fund (EFSF) directly if they cannot raise enough capital on the open market. This would avoid any further strain on the French state, already at risk of losing its AAA rating.

Mr Schäuble said the EFSF should be the last resort when all else fails – "Ultima Ratio" – and deployed only under the strictest conditions. He said the fund should not buy the debt of states in difficulty (presumably Italy and Spain) until they implement tough reforms under "tight control", signalling that Germany will not endorse blanket purchases of EMU debt to cap yields.

He ruled out any attempt to leverage the EFSF beyond €440bn by letting it act as a bank: "That would be to monetise European state debt. That is not acceptable."

The apparent German veto on any expansion of the EFSF leaves it unclear how Europe's debt crisis can be contained if the region tips into a double-dip recession, which would play havoc with debt dynamics. City analysts say the fund needs €2 trillion to restore confidence.

"We think Europe is going to struggle to escape market pessimism until we see the emergence of a lender-of-last resort, whether a much larger commitment from the ECB to buy bonds [ideally QE] or a significantly revamped EFSF," said Graham Secker from Morgan Stanley.

Whether the EFSF can safely be increased is unclear. Yield spreads between German Bunds and 10-year EFSF debt have widened from 66 to 112 basis points since early July. If yields creep much higher, the fund itself may become a problem.

Critics say Germany is making a policy blunder by treating the crisis as a Greek morality tale, losing sight of EMU's deeper structural woes. Portugal is as vulnerable as Greece, with higher levels of combined private and public debt and an equally large trade deficit. Spain is still in the early phase of its housing bust. Italy has lost 40pc in unit labour competitiveness against Germany since 1995.

Pulling the plug on Greece risks bringing a much bigger crisis to a head all too quickly.

http://www.telegraph.co.uk/finance/financialcrisis/8819195/German-push-for-Greek-default-risks-EMU-wide-snowball.html