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.

Eoin Treacy's view Greek 10-year spreads over German Bunds hit another record high today as they test the 2000 basis point level. A similar surge in risk premia was not evident in other European government bond spreads suggesting this portion of the Eurozone's crisis is focused almost entirely on Greece.

In one respect it is heartening that the German authorities have a "plan B" in case Greece is unwilling or unable to fulfil its part of the bailout agreement. However the repercussions are unlikely to be heartening for most Eurozone investors.

The Euro Trade Weighted Index has been forming a Type-3 top since 2008. It found medium-term support near 120 in June 2010 but the multi-month uptrend was capped with a large weekly key reversal in May and the Index has posted a progression of lower highs since. It extended the decline today and a sustained move above 130 is now required to question potential for further lower to lateral ranging.

The Euro Stoxx Banks Index hit another new low today. While oversold in the short-term, a break in the progression of lower highs, currently near 115, is the minimum requirement to begin to question supply dominance.