Europe likely to recapitalize banks

German Chancellor Angela Merkel, has called together the heads of the World Bank, and the International Monetary Fund (IMF), the World Trade Organization (WTO), the European Central Bank and other organizations, to develop a plan to handle Europe's current economic crisis.

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BERLIN, GERMANY (Catholic Online) - Merkel met on Thursday with IMF chief Christine Lagarde, and other senior financial officials. The talks were designed to come up with a plan to prevent European banks from collapsing in the event of a Greek default.

Although European officials deny that Greece is on the brink of a default, they remain nervous about the possibility. Investors are nervous too, and have been pulling their money from European markets causing those markets to go into a slow decline. Many of those investors have called upon European officials to take  more robust measures to protect the European economy from the risk of a Greek default.

Several large European banks, particularly in France, have purchased Greek sovereign debt. If Greece defaults on its obligations, those banks will lose billions. If the banks lose that money, they too could collapse. The collapse of the European banking sector has great potential to spill overseas and plunge the entire world economy into a deep recession.

Chancellor Merkel, along with several other heads of world financial institutions, is asking for European governments to re-capitalize the banks. The re-capitalization program would provide hundreds of billions of dollars to the banks in the event of a Greek default. This would keep the banks afloat, and would prevent a Greek default from having a more significant impact on the world economy.

A significant problem that the leaders face, is that banks have slowed lending to a trickle. Uncertain of the future, banks are holding as much capital as they can, and they are not lending it out. This has slowed recovery from the recession. As businesses both large and small find themselves unable to borrow money to invest in growing operations, growth remains stagnant.
Fortunately, if world financial leaders and political leaders can agree on a plan, experts believe it should work to prevent a Greek default from spilling over into the rest of Europe.

Already, the Bank of England surprised investors by announcing that it would add an additional $116 billion into the British economy, to help safeguard against a recession.

Bank of England governor, Mervyn King, told British finance minister George Osborne, that the move was needed to stimulate global economic recovery. He pointed out the severe strain that the European debt crisis was putting on financial markets.

Although the cash injection was expected, the amount of money injected by the bank into the British economy, is more than double what financial experts had predicted. Alan Clark, an economist at Scotia Capital said, "Once again the BoE has made use of its secret weapon - shock and awe." 

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If political and financial leaders can agree on this plan, they may manage to turn around one of the worst recessions that Europe has seen since the end of World War II.

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