All Euroland-countries should clean up their banks at all cost if they want stability in financial markets to return.The only real solution is that European banks are forced to write-down the value of their risk assets to real market prices (to those banks which do not want to play along, the EU should say: “ok; that’s fine with us but it means that from now on you are on your own. Should you get in trouble, we are ready to take you over and your shareholders lose everything”). That would be a one-time shock which only few institutions could absorb at once. Thus, banks need to be given a grace period of up to a maximum of 10 years to spread-out those write-downs. During this time no dividends!
Those banks which cannot make it even in 10 years ought to be wound down in orderly fashion.
One cannot imagine that Europe would not be able to absorb the losses from sovereign loans over a period of 10 years.
Once the markets see that a spade is a spade in banks’ financial statements, the nervousness will decline because one no longer has to speculate about skeletons which might be hidden in banks’ financial statements.