Banks Are Pushing Germany to the Brink

The German stock market has been the worst performer in the developed world over the past three years, and most of the emerging world, as well. Yet it is possible that the worst is yet to come in Frankfurt, as this epic plunge in equity values has only recently begun to erode the creditworthiness of German stocks' majority holders -- large banks at the country's moldering core.

The slow-motion collapse has not induced the sort of public anguish in Germany that the bear market has engendered in the U.S. because relatively few of the nation's citizens are shareholders. But bank failures -- in the unlikely event they're allowed to occur -- could change that, because most German workers put their income in savings accounts and depend on an increasingly shaky latticework of bank-backed bonds for their retirement.

And the damage would not be limited to the Continent, as German financial institutions own such U.S. market stalwarts as the Pimco and Scudder families of mutual funds.

Risk on the Rhine has intensified in recent weeks, as the country's break with the U.S. over the disarmament of Iraq has led to the possibility that the U.S. could close some of its military bases there and pull out a significant percentage of its 70,000 troops.

These troops are a major source of revenue for local German governments and retailers, and a wholesale redeployment of U.S. troops to friendlier and lower-cost countries like Poland and Bulgaria could weaken an already extremely fragile economy. Last week, Bulgaria's defense minister told reporters that his government had high-level talks with the Pentagon about the possibility of providing four or five bases to the U.S.

How much has the stock market in Frankfurt already suffered?