Financial markets face a tense week, as Greece totters on the verge of bankruptcy, while pressures in the European banking sector continue to build.

On Sunday, Greek Prime Minister George Papandreou tried to placate the country’s increasingly irritable creditors by unveiling a raft of emergency measures — including a two-year property tax — aimed at plugging Greece’s growing budget deficit.

The new measures come as a mission from the “troika” — the European Union, the European Central Bank and the IMF — are due to return to Greece this week to decide whether Athens will receive its next payment from the €110 billion ($US149.2 billion) bailout package agreed last year. Greece desperately needs this €8 billion payment if it is to avoid bankruptcy, but Germany has repeatedly threatened that the money will be withheld unless Greece can show that it can reach its deficit-reduction targets.

At a lengthy press conference, Papandreou explained that Greece now had to battle the “the ill-will” of certain European countries to get its second €160 bailout, which was promised only two months ago. “We must defend the country, it’s as if we were at war, it’s a similar situation,” he said, according to a report in French newspaper Le Monde. “It’s not pleasant to take these corrective measures … but now we’re not forgiven for anything, not even a gap of one euro.”

But Germany appears to believe that a Greek debt default is increasingly likely. According to a report in today’s edition of the German publication Der Spiegel, Germany’s Finance Minister Wolfgang Schäuble, now doubts that Greece can be saved from bankruptcy, and officials in his ministry are drawing up plans for handling a Greek default.

According to Der Spiegel, the officials expect that the eurozone’s bailout fund will play a key role, providing credit lines for countries such as Spain and Italy if they are unable to borrow after Greek defaults. In addition, the bailout fund could help recapitalise European banks, some of which would be saddled with massive losses from a Greek default. According to the report, “both developments are to be expected in a Greek insolvency, regardless of whether the country exits the euro or not”.

And, in a further sign that German authorities are now expecting a Greek default, Germany’s Economy Minister, Philipp Rösler, said that an “orderly insolvency” for Greece should not be ruled out. “To stabilise the euro, there can no longer be any taboos,” he told German newspaper Die Welt. “If need be, that also includes an orderly insolvency of Greece, provided the instruments needed for that are available.”

These latest comments come following reports last week that the German government was preparing plans to shore up German banks and insurance companies in the event that Greece failed to meet the terms of its bailout, and defaulted on its debts.

At the same time, there are growing worries about the damage that a Greek default would inflict on French banks. France’s major banks, BNP Paribas, Société Générale and Crédit Agricole, face another rocky week, ahead of a possible ratings downgrade. Investors are worried that Moody’s Investors Service will decide to cut the rating of all three banks because of their heavy exposures to Greek debt.

The share prices of the French banks have been smashed in recent weeks, as the eurozone debt crisis has worsened. Since the beginning of August, Société Générale’s share price has almost halved, while Crédit Agricole and BNP Paribas have seen their share prices drop by around one-third.

Last month, IMF boss Christine Lagarde worried investors by calling for an “urgent recapitalisation” of European banks, to ensure that they were strong enough to withstand potential losses from their exposure to debt-laden eurozone countries. Largarde, who was previously the French finance minister, added that unless the banks had a stronger equity buffer, “we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis”.

But Lagarde appears to have watered down her strong position. On the weekend, she said that the IMF’s original estimates of capital losses were only “tentative”, and that the IMF was in discussions with European officials.

*This article was originally published at Business Spectator