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. 
 
 Progress Report 
 
 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. German two-year yields declined to a record as investors sought a haven and Greek two-year note yields added as much as 86 basis points to 55.91 percent, a euro-era record. 
 
 Credit-default swaps insuring Greek sovereign bonds jumped 212 basis points to a record 3,238, according to CMA. The five- year contracts signal there’s a 92 percent probability the country won’t meet its debt commitments. 
 
 “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.” 
 
 Barroso Meeting 
 
 Merkel, who is due to discuss the crisis with European Commission President Jose Barroso in Berlin on Sept. 12, is battling to secure a majority among her coalition bloc to push an overhaul of the European Financial Stability Facility through the lower house of parliament on Sept. 29. The changes would give the EFSF the power to buy bonds in the secondary market, raising German guarantees to 211 billion euros ($290 billion) from 123 billion euros. 
 
 Longer term, euro countries will “only preserve the common currency if there is more integration” in the European Union, Merkel said in a speech in Berlin today. The EU “won’t be able to avoid treaty change.” While intensive discussions lie ahead and the path won’t be easy, policy makers “shouldn’t be afraid” of tackling the challenge, she said. 
 
 Policy makers in Europe “are moving,” U.S. Treasury Secretary Timothy F. Geithner said in a Bloomberg Television interview from the G-7 in Marseille. “But I think they’re going to have to demonstrate to the world they have enough political will.” 
 
 To contact the reporter on this story: Alan Crawford in Berlin at acrawford@bloomberg.net 
 
 To contact the editor responsible for this story: James Hertling at jhertling@bloomberg ||||| BERLIN/ATHENS (Reuters) - Fresh fears that Greece will have to restructure its mountain of debt, possibly as early as this summer, sent the euro and some euro zone bond prices tumbling on Monday as the bloc's debt crisis escalated. 
 
 German government sources told Reuters in Berlin that they did not believe Greece, which sealed a 110 billion euro ($158 billion) bailout from the EU and IMF a year ago, would make it through the summer without a restructuring. 
 
 Market confidence was also hit by a new threat to Portugal's pending bailout from the rise of an anti-euro party in Finnish elections. 
 
 The anti-euro True Finns party scored big gains in a Sunday vote and vowed to push for changes to a Portuguese rescue by the EU that is expected to total 80 billion euros when it is finalized by a mid-May deadline. 
 
 After a brief lull in the EU debt crisis at the start of 2011, it has blown up again and some analysts are now openly speculating that Greece and possibly other countries could eventually be forced to exit the bloc. 
 
 "You may see some countries deciding to leave the euro because they can't deal with the fiscal straitjacket that it imposes on them," Andrew Lynch, a fund manager at Schroders, told Reuters Insider. 
 
 A restructuring of Greek debt would be the first by a west European nation in over half a century and represents a challenge for EU policymakers struggling to reconcile the interests of their citizens with the costly steps needed to preserve the integrity of the 17-nation currency area. 
 
 Greece, saddled with a debt burden that is expected to swell to 160 percent of gross domestic product by 2013, has denied repeatedly that it plans to restructure. Bank of Greece Governor George Provopoulos warned on Monday it would have "catastrophic consequences." 
 
 "To be clear, Greece has money," when considering the public wealth that could be privatized, ECB Executive Board member Lorenzo Bini-Smaghi told Reuters Insider before a New York event sponsored by Chatham House, the home of the Royal Institute of International Affairs. 
 
 "You have the alternative of selling assets and accelerating privatization or going in the direction of major financial collapse, which would happen in the case of default or restructuring." 
 
 But German newspaper Die Welt quoted an unnamed Greek minister as saying it was only a matter of time before the government took such a step. 
 
 And government sources in Berlin told Reuters that some form of debt restructuring now looked unavoidable and suggested Greece move fast, rather than wait until its funding situation gets critical next year. 
 
 "Decisive voices within the federal government expect that Greece will not make it through the summer without a restructuring," a high-ranking German coalition source said. 
 
 CONTAGION RISK 
 
 European shares sank to their lowest close in three weeks on Monday and the euro fell more than two cents to trade briefly below $1.42, its lowest level against the U.S. dollar in nearly two weeks as the euro zone debt crisis rattled market confidence. 
 
 U.S. stocks also took a hit after Standard & Poor's cut its credit outlook for the United States to negative in a reminder that the euro zone is not alone in suffering from high debt and deficits. 
 
 The cost of insuring Greek debt against default jumped and Spanish 10-year bond yields rose toward record highs near 5.6 percent, while Portuguese yields hit a new peak of 9.4 percent. 
 
 European officials have been at pains to stress that Spain can avoid the contagion that has forced Greece, Ireland and Portugal to seek rescues. Its much larger economy could strain the bloc's resources to breaking point if it did succumb to the need for a debt bailout. 
 
 Data on Monday showed an accelerated drop in Spanish housing prices in the first quarter and a surge in yields at a government treasury bill auction. 
 
 Spain faces a further test of demand for its debt on Wednesday when it aims to raise 2.5 to 3.5 billion euros with two long-maturity issues. 
 
 GREEK DEBT BIGGER THAN ARGENTINA BEFORE DEFAULT 
 
 In order to return Greece's economy to a sustainable path, most economists agree that it needs to write off roughly half the value of its outstanding debt, hitting private creditors with significant "haircuts" on their holdings. 
 
 Greece's debt load of 325 billion euros is nearly double the level most economists see as sustainable and far bigger than that of Argentina when it defaulted in late 2001. 
 
 But EU leaders have promised not to make private debt holders pay before 2013. 
 
 Doing so in the near-term, when the bloc remains vulnerable, could raise pressure on Portugal and Ireland to restructure their debt also, threatening bank balance sheets in the euro zone. 
 
 Winning creditor agreement for a milder form of restructuring, like a voluntary extension of debt maturities, is likely to be difficult. 
 
 And even if it does work, it would probably not make enough of a dent in Greece's debt burden to ensure sustainability over the longer-term. Markets may view the "restructuring lite" option as merely the first step in a two-stage restructuring, with the real pain yet to come. 
 
 PORTUGAL BAILOUT AT RISK 
 
 Meanwhile, in neighboring Portugal, representatives of the European Commission, European Central Bank and International Monetary Fund were meeting government officials on Monday to set the terms for the bloc's third rescue in a year following multi-billion euro deals for Greece and Ireland. 
 
 After the election in Finland, however, that bailout could come under threat. 
 
 The anti-euro True Finns party which scored big gains in the Sunday vote, vowed to push for changes to the Portuguese rescue. 
 
 It may take weeks to find out whether True Finns will become part of a new government in Helsinki and be able to deliver on that threat. The party that won the most votes in Finland is pro-European and seems unlikely to compromise its stance even if it does end up in a coalition with True Finns. 
 
 But the result underscored the extent of public anger in northern Europe at the series of aid deals for stricken euro zone countries that mismanaged their economies and finances. 
 
 "It is extremely difficult for politicians in Europe to ignore the strong signal from Finland," said Steen Jakobsen, chief economist at Saxo Bank. "Ultimately this could mean a move away from bailouts with no burden sharing by private investors and banks." 
 
 Any delay in approving the bailout deal for Portugal beyond May could leave the country scrambling for new sources of funding. It faces an election on June 5 and has warned it will run out of money around the same time. 
 
 (Reporting and writing by Noah Barkin; additional reporting by Al Yoon in New York) ||||| Media playback is unsupported on your device Media caption German Chancellor Angela Merkel says reform plans must continue in Greece 
 
 Greek conservative Antonis Samaras has three days to form a coalition, faced with EU warnings to keep to the tough terms of international bailouts. 
 
 Two-thirds of Greek voters backed parties opposed to the EU/IMF deal, renewing fears that Athens may default on its debts and leave the eurozone. 
 
 Germany's Angela Merkel has made clear that Greece's reforms must go on. 
 
 But her focus on austerity has taken a knock with the election in France of pro-growth Socialist Francois Hollande. 
 
 Mr Hollande campaigned on a platform of renegotiating the terms of the EU fiscal pact to concentrate more on reviving economic prosperity than simply reducing budget deficits. 
 
 'Utmost importance' 
 
 Analysis New Democracy will try to form an austerity-supporting pro-European coalition government, perhaps with a third party, because it would not gain enough with Pasok to form an absolute majority. But the anti-bailout party Syriza will also try to form an alternative coalition government. There could be a clash of the two - we could be facing fresh elections within weeks. This country is now placed into a period of intense political instability - and by extension the eurozone as a whole. A majority of Greeks have voted against the bailout and against the austerity, which will make it very difficult for the EU or IMF to call for yet more austerity here. The success of the new-right Golden Dawn party indicates how comprehensive a rejection of the political mainstream, the bailout and austerity there has been. The stability and the future of Greece are now in doubt once again. That will bring a lot of dismay to the financial markets and to the eurozone as a whole. 
 
 Mrs Merkel said she would meet France's next president next week "with open arms" but told a news conference that "we in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable". 
 
 The German chancellor added that the Greek debt reforms were of "utmost importance". That message was underlined by European Commission spokeswoman Pia Ahrenkilde Hansen, who said Brussels "hopes and expects that the future government of Greece will respect the engagement that Greece has entered into". 
 
 Any political instability in Greece may prompt fresh questions over the country's place in the eurozone. Under Greece's current bailout plan, a further 11bn euros of cuts in spending is due to be found next month. 
 
 News of the Greek vote and the election of Francois Hollande sent the euro falling to its lowest level against the dollar since January. Shares on the Athens stock market tumbled, with the Athex index sliding more than 7% in morning trading. 
 
 Political revolution 
 
 Although a protest vote against the stringent austerity measures enforced on Greeks had been widely expected, in the event the two main parties that had agreed the bailout terms, New Democracy (ND) and socialist Pasok, attracted less than a third of the vote. 
 
 For Greece, it amounts to a political revolution as the country has been run by either one party or the other since the 1970s. Since November, they have been in a coalition, led by technocrat Prime Minister Lucas Papademos, which secured this year's 130bn euro deal. 
 
 Pasok was also in power when Greece negotiated the terms of its 2010 bailout of 110bn euros (£88bn; $143bn). 
 
 New Democracy's support on Sunday slipped from 33.5% to less than 19% of the vote while Pasok's share plummeted from 43% to just over 13%. 
 
 A radical left coalition, Syriza, came second, in front of Pasok, with 16.8% and a party of ultra-nationalists - Golden Dawn - polled almost 7%. 
 
 Having polled the most votes, ND leader Antonis Samaras has begun talks to try to convince other parties to join a new coalition, but only Pasok are so far thought likely to show interest. Pasok's leader and former Finance Minister Evangelos Venizelos has called for a broad coalition government of pro-European parties. 
 
 "A coalition government of the old two-party system would not have sufficient legitimacy or sufficient domestic and international credibility if it would gather a slim majority," he said. 
 
 'Tragedy' 
 
 Allowed only three days to seek a deal by President Karolos Papoulias, the centre-right leader has pledged to keep the country in the euro, although he has promised to try to amend the bailout terms in order to boost growth. 
 
 His first meeting with Syriza leader Alexis Tsipras, the runner-up in the election, came to nothing. 
 
 Mr Tsipras, speaking on Greek TV, said the bailout deal was a "tragedy", and he held out the possibility of a coalition involving "the forces of the left". He has already described the parties that signed the EU/IMF bailout as "de-legitimised" by the public. 
 
 Media playback is unsupported on your device Media caption Greek voters voice their concerns over the instability in the country 
 
 Mr Samaras went on to have talks with Pasok's Evangelos Venizelos. He is also due to talk to Fotis Kouvelis from Democratic Left, who has already made clear his objection to a coalition agreement with Mr Samaras. 
 
 In fourth place were the new right-wing Independent Greeks with 10%. 
 
 Their leader, Panos Kammenos, has already ruled out co-operation with either Pasok or New Democracy, Athens News reported. 
 
 The extremist Golden Dawn party is on course for at least 20 seats in parliament. 
 
 "It is time for those that betray [Greece] to be afraid," its leader Nikolaos Mihaloliakos warned. "We are coming. We are Greeks, nationalists, and we will allow no one to doubt this." 
 
 Deal in doubt 
 
 If Mr Samaras fails to reach a coalition deal, the party in second place, Syriza, can try to form a coalition, and if still unsuccessful, the third party will receive the mandate. 
 
 If still no coalition emerges, Greece will hold another election - a prospect which would alarm the country's international creditors. 
 
 The ability of any new government to carry on with the austerity programme will be crucial for Greece's continued access to bailout funds from the EU, the European Central Bank and the International Monetary Fund - the so-called troika.
– The euro took a nose dive today, and so did the bonds of weak eurozone nations, as investors panicked over fresh speculation that Greece will have to restructure its debt in the near future, and the election of an anti-Euro party in Finland. German government sources tell Reuters that they doubt Greece will be able to get through the summer without restructuring. Greece, however, has repeatedly denied that it would do so. "It would have catastrophic consequences," the Bank of Greece's governor said. Speculation was also rampant that the new Finnish government would throw a monkey wrench in Portugal’s bailout negotiations. EU negotiators issued a statement today insisting that wouldn’t happen. “There are no changes in plans,” a spokesman said. “We're fully confident that member states will honor their commitments.” Irish Prime Minister Enda Kenny, meanwhile, reassured observers that Ireland intended to pay its debt. “The Greek government will obviously deal with this problem in the best way it can,” he told Bloomberg. “We have no intention of defaulting.”