Analysis: Banks prepare for Greek default, want EU help

Sep 25, 2011, 5:05 p.m.

The IIF, which represents major global banks, said that bank liquidity problems already are spreading worldwide. Poland is seeing sharp withdrawals of funding and Korea, putting downward pressure on their currencies, its economist Philip Suttle said.

To stabilize the situation and prevent a Lehman-style seize-up of financial markets, one senior international finance diplomat said European leaders need to unveil a bailout package of "shock and awe" proportions to cover both sovereign and bank debt.

Only a huge announcement would convince financial markets that European leaders will backstop markets, prevent solvent banks from collapsing and prevent contagion, he said.

European officials were discussing ways to strengthen their 440 billion euro European Financial Stability Fund, possibly leveraging it to the tune of 1-2 trillion euros.

Bankers at the meetings welcomed these discussions to ring-fence the financial system from a disorderly Greek default. Domenico Lombardi, a former IMF official now at the Brookings Institution, said it certainly is needed.

"I believe the strategy that European policymakers are trying to implement is to buy a little of extra time, a few more weeks or maybe a couple of months, in order to get the enhanced EFSF in place so that the European rescue fund with added operational capability ... could recapitalize the European financial institutions," he said.

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