Greek Fire, Part 34

We're not quite in full panic mode in Europe yet, but we're close.

A year after European officials bailed out Greece, investors say the region’s banks haven’t raised sufficient capital or cut loans enough to withstand the contagion that may follow a default.

While European lenders reduced their risk tied to Greece by 30 percent to $136.3 billion last year by not renewing loans, writing down the value of debt and shifting it off their books, they still have almost $2 trillion linked to Portugal, Ireland, Spain and Italy, figures from the Bank for International Settlements show, leaving them vulnerable if the crisis spreads.

“The Greek debt situation certainly has the potential to create havoc with the European banking system,” said Neil Phillips, a fund manager at BlueBay Asset Management Plc in London, which oversees about $45 billion. “A Greek default and the ramifications of that would be too ghastly for Europe and the European banking system to contemplate right now.” 

It's gotten to the point where the ECB is now considering halfway measures just to buy time.

European governments weighed withholding half of Greece’s next 12 billion-euro ($17.2 billion) aid payment, seeking to keep the country solvent while maintaining pressure on the government to slash the debt that pitched the euro area into crisis.

Euro-area finance ministers may authorize only a 6 billion- euro loan to tide Greece through bond redemptions in July, while further aid hinges on Greek budget cuts, Belgian Finance Minister Didier Reynders said.

“We will in any case try to release the necessary funds for the short term,” Reynders told reporters before a meeting of euro-area finance ministers in Luxembourg that began late yesterday. 

Greece's government is on the brink and the Greek people aren't going to be the ones that and left with the bag, looks like.  That means European banks are on the hook, and that's going to cause some rather interesting chain reactions down the road.

I can't get over the distinct feeling that nobody in Euroland seems to have any idea how to fix this disaster, either.