European banks are preparing for defaults.
Although the European debt crisis has been dragging on for roughly a year and a half, it appears to have entered a new, more perilous, stage this week. Expectations have faded that European officials will be able once again contain Greece's problems and avoid a destabilizing default that would inflict losses on banks holding Greek debt.Emphasis mine. They're not quite at the stage yet where they need to demand that existing debts be repaid immediately, but they're not lending any more money. This act in and of itself is enough to slow economic growth in these countries.
In the process, the spotlight has turned back to Italy and Spain's debt problems. Earlier in the year it had become conventional wisdom that despite economic and fiscal problems of their own, those countries had been walled off from Greece's woes. But the recent focus on Italy suggests that isn't the case.
"Apart from the ECB, there are currently no big wallets in the EU that are capable of supporting Spain and Italy," said Willem Buiter, Citigroup Inc.'s chief economist.
One senior London banker said his bank is drawing in untapped credit lines to companies in Spain and Italy. An official with another major European bank said it is considering similar moves, although it is nervous that such actions could send a destabilizing signal that the bank is in trouble.