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 ||||| NEW YORK (MarketWatch) — U.S. stock indexes dove Friday on heightened worry about Greece’s debt crisis, pushing the dollar to a six-month high against the euro and 10-year yields to a record low. 
 
 The distress came along with news that the European Central Bank’s top economist had quit and that Germany was reportedly preparing to safeguard its banks against a possible Greek default. 
 
 “The perception is the ECB is not on the same page, that it doesn’t have a clear vision of how to stimulate the economy,” said Brad Sorensen, director of market and sector analysis at Charles Schwab Corp. 
 
 Tallying its sixth straight triple-digit move, and its worst day in more than three weeks, The Dow Jones Industrial Average DJIA, +1.28% lost 303.68 points, or 2.7%, to 10,992.13, down 2.2% from the week-ago close. 
 
 All of the blue chips’ 30 components lost ground, including McDonald Corp.’s MCD, +1.31% off 4%, after the world’s biggest burger chain reported a less-than-anticipated increase in global sales for August. 
 
 Also weighing on the Dow, Bank of America Corp. BAC, +3.92% shares shed 3.1% on a Wall Street Journal report that executives have discussed cutting about 40,000 jobs in an initial restructuring wave. 
 
 The “disappointing results from McDonald’s didn’t help matters, and more jobs cuts from Bank of America — add those things up and you get some pressure,” Sorensen said. 
 
 Down 1.7% for the week, the Standard & Poor’s 500 Index SPX, +1.64% declined 31.67 points, or 2.7%, to 1,150.09, with energy and natural-resource firms hardest hit among its 10 industry groups. 
 
 The Nasdaq Composite Index COMP, +1.85% shed 61.15 points, or 2.4%, to 2,467.99. 
 
 For every stock rising more than six declined on the New York Stock Exchange, with more than 1.2 billion traded; composite volume neared 4.5 billion. 
 
 As equities were hammered the U.S. dollar rose to a six-month high against the euro EURUSD, -0.2772% , while the 10-year Treasury yield TMUBMUSD10Y, +0.00% used in determining rates on consumer loans including mortgages fell to a record. 
 
 List of worries 
 
 The ECB said Juergen Stark, a proponent of higher interest rates, would step down from its executive board by the end of the year, signaling a possible dispute among policy makers over how to combat the regional debt crisis. 
 
 Stark’s move came as financial leaders from the globe’s most developed nations met in France to devise a strategy to bolster the world economy. 
 
 Bank of America mulls major layoffs (3:24) Bank of America executives have discussed eliminating roughly 40,000 positions during a wave of restructuring — known as "Project New BAC" — that CEO Brian Moynihan is expected to discuss Monday, people familiar with the plans say. 
 
 Stocks’ losses intensified after Bloomberg News reported German officials were readying a plan to recapitalize German banks should their Greek holdings overcome balance sheets. 
 
 “Some in Europe are finally realizing that the money being funneled to Greece to buy time from the inevitable would be better put to use to recapitalize banks to insulate them from sovereign haircuts,” Peter Boockvar, equity strategist at Milller Tabak, wrote in an email. 
 
 Sorensen at Charles Schwab said Europe is the dominant story for Wall Street and behind the ongoing volatility. 
 
 “We have fiscal issues here, but nobody is seriously considering that the United States is going to default or break apart,” said Sorensen in contrasting Europe to domestic concerns. 
 
 Stock-index futures had edged lower ahead of the ECB-related news as investors worried whether political gridlock in Washington would continue in the wake of President Barack Obama’s proposal unveiled Thursday night to create jobs and help lift the U.S. economy. 
 
 “Once it gets into Congress, what comes out the other end is another thing. The process is not something the market is all that confident in,” said Sorensen. 
 
 More from MarketWatch
– President Obama might be getting good reviews for his plan to shore up the US economy, but investors are far more worried about Europe, reports MarketWatch. The Dow was down more than 300 points at midday to below 11,000, and both Nasdaq and the S&P 500 were each down more than 2.6%. A Bloomberg report that Germany is preparing a contingency plan to protect its banks from a Greece default is contributing to the malaise.